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PI Industries Ltd
Earnings Call Analysis
Q3-2024 Analysis
PI Industries Ltd
The narrative for this quarter's financial saga begins with noteworthy growth; revenue climbed 18% to INR 18,975 million, bolstered by a significant 20% surge in exports which tallied up to INR 16,300 million, despite a 6% retreat in domestic sales, standing at INR 2,655 million. Empowered by a robust product mix and operating leverage, gross margin and EBITDA margins flourished, spiking approximately 300 basis points. This translated into a striking 28% profit after tax increase, peaking at INR 4,486 million, aided by both EBITDA growth and a more lenient effective tax rate. The year-to-date performance paints a similar portrait of growth with revenues swelling by 20%, reaching INR 59,248 million, while profit after tax ascended a steep 38% to INR 13,120 million, propelled again by escalating export earnings.
The company not only demonstrated agility in revenue generation but also showcased operational excellence with operating cash flow expanding by 16%, arriving at INR 11,561 million, or INR 12,889 million when Pharma is excluded from the equation. This was a byproduct of heightened EBITDA and a more streamlined working capital management strategy which trimmed the trade working capital duration by 10 days, down to 80 days. Inventories were pruned to echo this trend, reducing to about 59 days worth of sales. These metrics reflect a firm grip on financial health, as the net worth burgeoned to INR 84,508 million as of December end. The capital expenditure for the year trailed the strategic plan at INR 9,001 million, with a substantial INR 4,972 million sunk into Pharma assets. The surplus cash, adjusted for debt, stood proudly at INR 32,926 million, testament to the company's resilient balance sheet and cash flow in line with disciplined financial strategy and execution.
The company remains unflinching in its ambition to maintain growth momentum without pinpointing specific guidance for the quarter. The growth engine has been fueled by a slew of new products spanning across agriculture and specialty chemicals, resulting in an exceptional over 60% growth contribution from these novelties. Challenges in the domestic market are expected to linger but the new crop protection products have shown promise especially in key areas such as chillies, fruits, vegetables, and wheat. The company has cultivated a deeper engagement with clients, avoiding any reverberations from the Agchem space's global slowdown, by staying anchored to early-stage molecules and patents that are witnessing natural year-on-year growth due to newer global registrations.
While steering clear of committing to precise numbers, an 18% to 20% growth for the fiscal year has been hinted at, dipping towards the lower end of the forecast, assuming the company can navigate the domestic market's headwinds in the final quarter. This projection envelops the overall business, including the Pharma segment. On the profitability frontier, an EBITDA margin hovering around 25-26% is considered sustainable, attributing this level to the product mix and strategic development expenditure across both pharmaceutical and agricultural inputs with EBITDA margin improvement driven largely by the growth abroad.
Amidst the tale of growth and optimization, challenges emerged with shipments to Europe and the U.S. facing disruption, leading to hikes in shipping costs. Nevertheless, the company confidently passes most of these additional costs onto the customers, hinting at robust contractual terms and bargaining strength. Looking ahead, upcoming capital expenditures projected to range between INR 600-800 crores annually, may bolster capacity and expanding technological capabilities such as Flow Chemistry, setting the stage for further improvements in asset turns, reinforcing the overall narrative of sustainable growth despite a backdrop of macroeconomic shifts and industry dynamics.
On the fiscal frontier, the current year's effective tax rate is anticipated to be contained between 14% and 15%, with expectations to extend into the next fiscal year. This figure notably diverges from the standard 25% rate but requires precise computations that will be unfolded in the approaching quarters, underpinning a narrative of prudent tax management and optimizing cash flow for continued expansion.
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Ladies and gentlemen, good day, and welcome to Q3 and 9 Months FY '24 Earnings Conference Call of PI Industries Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Siddharth Rangnekar from CDR India. Thank you, and over to you, sir.
Thank you. Good afternoon, and thank you for joining us today on PI Industries Quarter 3 and 9M FY '24 Earnings Conference Call. Today, we have with us senior members of the management, including Mr. Mayank Singhal, Executive Vice Chairman and Managing Director; Mr. Rajnish Sarna, Joint Managing Director; Mr. Manikantan Viswanathan, Chief Financial Officer; and Mr. Prashant Hegde, CEO of Domestic; and Mr. Atul Gupta, CEO of Exports. We are also joined by Mr. Anil Jain, MD, PI Health Sciences.
We shall hear comments of all the key perspective from Mr. Singhal. After that, we'll have Mr. Manikantan share his views on the financial performance of the company. Thereafter, the forum would be open for interactive question-and-answer session.
Before we begin, I would like to underline that certain statements made on today's call could be forward-looking in nature, and a disclaimer to this effect has been included in the investor presentation shared with you earlier and which is also available on the stock exchange website.
I would now like to invite Mr. Singhal to share his perspectives with you. Thank you, and over to you, sir.
Yes, thanks Siddharth. Thanks. A very good afternoon to all of you for joining the call today for Q3 earnings '24. Over my remarks, I shall come over the strategic and operating progress that we have made in the company. I'm glad to report a good set of results for Q3.
Let me briefly cover the highlights. PR has recorded an 18% growth in quarter 3 over the comparative period of last year. Our EBITDA and PAT has shown a good moment coming at 34% and 28%, respectively. Recent times have seen industry dynamics and global geographical tensions, climate change and created adverse impact on the working patterns of Agchem. Industry point towards competitors, we have seen China offloading material in global markets, consequently, trade channels are yet with a high inventory and the flow of products for manufactures as their [indiscernible] are more impacted than others internationally, but at an overall level, the general product is the most popular and on the track of declining month on month.
PI stands apart as a unique business model [point to service] with a differentiated portfolio of molecules and exports a range of brands comprising of specialized products, our respect for IPR and meticulous execution and continuous investment in innovation for being the supported pillars to work in this model. The growth you are seeing in exports for us is the result of our focus on early-stage patent and molecules. They're still going in many countries and obtaining registration in several others. If you track the entire aftergrowth in the beginning to maturity, our track record of meeting global requirements of some of the largest products and IP holders over the years. Our strength is in mutual respect of the relationship we share.
In fact, we are ramping on the top 3 CSM companies in the world, and that's truly marked as a complex operation [indiscernible] due to the demonstrative capabilities in technology, advanced processes, our relationships have with global innovators has grown very deep. Both at the product sourcing level and also the processes innovation where our expertise is on par. Over the years, we have supported the growth of advanced molecules of innovators and given a pipeline if the cycle continues. It is a kind of [max] in which the cycle replenishes itself with pipeline in products and new admissions. Our [Domestic] businesses again will pose a potential of early-stage molecules that are being launched by us as brands, whereas in this space, we have seen some disperformance owing to monsoon deficit in the South, depleting reservoir levels, elevated inventory levels on row crops and price pressures, our emphasis has been on driving high quality of revenue at better margins.
Our superior product mix and declined working capital management has contributed very well, which again is very unique to us. We have been deploying horticulture category as well as those brands have shaped up well, creating value for farmers of fruits and vegetables across the geography. Through Jivagro, India's only horticulture specialist, we have nearly 60 brands. Biologicals and botanicals have also grown strongly and has done well for us. We have our portfolio of patent products [indiscernible] over 2 decades best in the process of development and building phase, and we continue to expand this pipeline.
As you look into the future, in exports, we have still been working towards diversifying our names. Whereas growing is coming from molecules in the Agchem, we shall continue and shall continue to come from there, we have grown our footprint well beyond Agchem. We have established our long capabilities in high-quality markets, electronic, chemicals and other speciality chemicals. The state of the growth is originating new products, more than 50% growth in Q3 has come from here. Beyond that, we have visibility up to 5 new molecules, 50 new molecules in the R&D pipeline. The share of non-Agchem molecules in the inquiries have significantly grown by 30%.
The proportion of new Agchem molecules that are our good run rate growth ahead of that, and we see high commercialization on accounts up for 30% of this commercialized going ahead. This will get commercialized in the future with each product giving us growth curve on its maturity. Similarly, on the domestic side, our products are introducing novel molecules with underlying performance. We launched 5 new products in the current fiscal year.
Over the last year, we have found wide acceptance and helped us mitigate the revenue decline in the industry. At these larger brands, I have seen healthy intake -- uptake on the insecticide, Claret in paddy herbicide care. So a newly patented fungicide, Kadett in soybean and groundnut and the bio-fungicide, Piilin in grapes and chillies. We have a robust pipeline over 20 products both under registration and development that will drive growth in the years to come. Our teams are intensely working on the fields to help old farmers and the nuances of right solutions to the products that are generating loyalty in building brand demand. We can see our range of biologics site. We're very attractive in cutting edge. We have launched a brand called AMINOGROW which has met a good response. Bionutrients, represent a growing category of product with farming.
Moving on, our strategic objective to diversify into Pharma has been achieved and [indiscernible] integration of the fact which helps global construction. PI is working towards integration of CRO, CDMO, API platforms. CRO-CDMO which delivered comprehensive solution to our clients.
Work continues to enhance and modernize the setup capability in technological initiatives at both research and manufacturing locations in India and Europe. Investments are also being made towards building a strong resource base in order to support the need for the big pharma biotech clientele, thereby intensifying a new business development pipeline. We believe the power business is moving in the right direction and on path to build a future growth engine for PI.
Whereas I have allured to this earlier in my remark, we are [accepting] the business is stronger owing to the initiatives of science and technology. We are truly proud of India as one of the only fully integrated Agchem company. We are the only integrated single-site centre that encompasses chemical synthesis to biological evaluation to process development to scale-up under one roof at a doable scale and number of -- more than 900 people on that report. Our investments include integrated single-site centre [indiscernible]. Our world-class R&D setup engaging over 800 scientists as mentioned, PhDs and 155 patients applied so far. There are a focus on newly building blocks that will give us opportunities across and lead us to newer capabilities and ultimately we've been creating new business out of this. Over the year, the attributes have translated into stronger business patterns and deepened white pipelines are yet to began in the market.
Now just an update on the edge -- I believe sustainability is the culture and driver than an obligation or passion, as defined by a purpose of we managing our India clients. We have improved S&P Global score of Corporate Sustainability Assessment ranked in 95th percentile as a well-retained Ecovadis Gold medal in sustainability achievement with 98th percentile ranking.
PI featured in the S&P Global Sustainability Yearbook of 2024 has given us a distinction mark amongst the best ESG rated companies globally. Initiative to support SDG and integrated well within the planning and operating of the business has growth reviews, we are doing so with great responsibility.
We continue to actively seek and evaluate opportunities in an inorganic domain, in line with the strategic and operating aspirations, complement growth that leads to our business. The outlook for the year remains positive, and we are in the path of delivering a valuable performance in '24.
This brings me to the end of my remarks. I would now ask Manikantan to take this forward and [indiscernible] for joining this call today and to be a part of our growth story. So over to you, Mani.
Thank you, Mr. Singhal. Good afternoon to everyone on the call today. I'll summarize the company's financial highlights for the third quarter ended December 31, 2023. Please note that all comparisons are on a year-on-year basis and refer to the consolidated financial performance.
As Mr. Singhal has shared, our performance demonstrates a differentiated approach to doing business and a sharp focus on keeping operating parameters in line with our objectives.
To share the performance highlights, during Q3 FY '24, we reported a revenue of INR 18,975 million, a growth of 18% over the same period of last year. This was driven by growth in exports revenue by 20% to INR 16,300 million and 6% decline in domestic revenues to INR 2,655 million. Gross margin and EBITDA improved mainly on account of favourable product mix, operating lever and on-time interest of recovery of debt materials, contributing around 300 basis points improvement in EBITDA. Profit after tax increased by 28%, INR 4,486 million attributable to EBITDA growth and lower effective tax rate.
We also have a YTM performance for FY '24. YTM 31 December revenue was INR 59,248 million, a growth of 20% for the same period last year. This was driven by solid growth in export revenues by 29% to INR 48,434 million with 7% decline in domestic revenue to INR 10,979 million. Profit after tax improved by 38% to INR 13,120 million. Effective tax rate for YTM is 11.56% growth in export earnings.
Cash flow from operating activities increased 16% to Rs. 11,561 million and Rs 12,889 million excluding Pharma. This was due to higher EBITDA and improved working capital management. The trade working capital in terms of number of days is reduced by 10 days to 80 days compared to the previous year. Inventory levels also reduced in terms of f Days of Sales to approximately 59 days to INR 12,743 million. Our balance sheet has been content during the year. Network increased to INR 84,508 million as on 31st of December 2023. YTM capex stood at INR 9,001 million including Pharma acquired assets of Rs 4,972 million and is in line with our plan. Surplus tax net of debt is INR 32,926 million as of December 31, 2023. Our balance sheet and cash flow have stood robust in line with clear financials strategy and disciplined execution by enabling a superlative performance.
This conclude my opening commentary, I will now request the moderate to open the forum for Q&A. Thank you.
[Operator Instructions] The first question is from the line of Aditya Jhawar from Investec.
Congrats of good set of numbers, especially in this environment. My first question is, if you can highlight that which are the new geographies where the product registration is still underway for [indiscernible] that is number one. Number second, if you can highlight what is the pricing erosion we have seen in the markets like Australia and Argentina, where the product has become generic?
Aditya, can you please repeat your question because your voice was not very clear?
Yes, sir. Sir, just one of our key products [indiscernible]. If you can highlight which are the key markets where the registration process is still on, that is number one. I'll take think the number two later, sir.
Yes. So there are many countries, but I hope you will appreciate that it is not PI which is doing this registration. It is the innovator company. And we may not have the detailed information. But we understand that there are several countries these registrations are in process.
Sure, sir. So just how much pricing erosion we have seen -- we will have some market intel in markets where the product has become generic like Australia, Argentina?
Again, to be honest, we won't have the firsthand information. The market intelligence says that it varies from 10% to 15% in the initial years. But again, this is not firsthand information.
Okay, okay. And sir, if you would like to highlight that you mentioned some commentary on the CapEx front. So what kind of CapEx intensity we should expect in FY '25? And what could be your guidance going into FY '25, sir?
Well, lots will also depend on the progress of the pipeline, but we still maintain INR 600 crores to INR 800 crores enough CapEx that we will look at for organic growth -- expansion and growth.
Okay. Sir, what about the guidance of growth?
We will have more clarity on this maybe by quarter 4.
Okay. Sir, final question, you mentioned that your visibility is reasonably strong in the near to medium term, right, sir, for growth?
Sorry. Come again?
Sir, from growth perspective, so you have not spelled out FY '25 guidance yet. But from a near to medium term perspective, how is the visibility on growth, sir?
Yes. So we'll have a specific guideline again at the end of fourth quarter. But yes, as of now, we sustain -- we maintain our earlier indications that we are confident of sustaining this growth momentum.
Next question is from the line of Ankur Periwal from Axis Capital.
Yes. Congratulations for a good set of numbers. I hope my voice is audible.
Your audio is not clear to us, Ankur.
Is it better now?
Yes.
Congrats on a good set of numbers. My first question was on the pricing cut. Typically, historically, seeing that -- across the innovator molecules or products that we have been working on, what has been the worse case pricing cut that we would have seen historically?
This you're talking about what? I mean, because we're working on both sides, on manufacturing, also on marketing end also. You are not very clear what is...
On the patented CSM side, you did -- alluded towards around 10% to 15% pricing cut that we have seen until now given the product getting generated in some of the key markets globally. This is our earlier experience?
I don't think this was the question. The question was that what is our market intelligence of what is the kind of price reduction in one of the market where product [indiscernible]. There was no -- I mean, I don't think the question was at what is the price bid that we have seen.
No, no, you have seen. The final product pricing was what I was referring to. On the similar lines, historically for any branded product, patented product turning generic, what has been the worst-case pricing cut we would have seen? A broad range would be helpful.
So there's nothing like worst case or best case. I mean, if you look at the industry and be in the segment, you will know this better. It's quite a standard approach of what pricing [indiscernible] play up in the industry. So there is nothing which is really the worst case, what is worse and what is good. Again, as you know, the volume will pick up. Costs also changed. So the price is determined by the scenarios in different products and different segments.
[Technical Difficulty]
Sir, sorry to interrupt. Your voice is breaking. Ladies and gentlemen, please stay connected. The line for the management dropped.
Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected. Sir, go ahead.
Yes, as I was mentioning, you can look at -- I mean, there is no one to say, this is the way it is when there's spectrum of price cuts, and price cuts are dependent ways, but I think, we broadly mentioned what is a segment. And that's more in the end of the price -- sales prices, as you know it is the one who drives the prices in the market.
Sure, sir. Fair enough. Second question on the growth part. While we are not guiding anything in particular this quarter, but directionally, you did mention we will maintain the growth momentum. Trying to understand, from a new product ramp-up perspective, since we have been pretty reasonably aggressive in terms of our launches over the last 2, 3 years, any of the products across agri and non-agri side which are seeing good ramp-up from the client perspective on the CSM side?
Yes. So as we have also indicated that, for example, in this current quarter, there is significant growth which has been contributed by the new products. Those have been commercialized in AgChem as well as in other specialty chemical space. More than, I think, 60% growth has come from these products and likewise -- I mean, the remaining -- I mean, on the fourth quarter as well as coming years, we are -- we have a good visibility of many of these new products contributing to the growth, growth of the export business that we are talking.
Sure. That's helpful, sir. And lastly, if I may. On the domestic market, any time lines or thoughts on the revival or growth uptick that you can share of?
Prashant?
So domestic market, we basically expect the challenges to continue in Q4 because of the external conditions which I have seen and from that. However, our new products have really done well even in the domestic market, both in -- whatever which you have seen in Q3, especially on chillies and fruits and vegetables, that were the major focus crops as well as even on wheat.
Next question is from the line of Madhav Marda from Fidelity Investments.
I had a couple of questions. The first one was, given whatever changes have happened -- rather, whatever slowdown we've seen in the global Agchem space, have there been any change in our engagement with our clients in terms of new products? Or have you seen any client saying that we want to go back to China now versus sourcing from the larger Indian CMO company? Has there been any discussion on that, sir?
Well, frankly, we have not seen any change in our engagement. In fact, these engagements have only gone deeper with the clients and the customers, strategic partners that we are dealing. In any case, as we explained earlier, we focus on early-stage molecules and in those kind of molecules, what is definitely happening globally, the kind of headwinds that we are seeing in generics and commodities, those are not the kind of situation that we have seen in those molecules. And therefore, our clients conveying or thinking of going back to China or to other geography for sourcing is not the situation that we are seeing or facing. And our engagement at the same level, rather it is growing deeper with our global partners.
Understood. And my second question was slightly more basic one. Like in the Pharma piece, when we talk about the kind of projects that we want to do with the biotech or big pharma customers, is it basically doing research for them at the Phase I, Phase II, Phase III kind of stage or what kind of projects are we doing? If you could give some more sense on the business model here, it'd be very helpful. Sorry for the very basic questions, I just wanted to understand better.
Very clearly, the business model is that of a CRO contract with such services, right, supporting early-stage discovery services for innovators.
Got it. So then the growth basically comes from like sort of engaging with them at Phase I, Phase II, and then as the molecule progresses, we scale up the business? Is that how we should think about it going ahead?
Yes. This is longest station period business that takes its own. [indiscernible] focusing on the innovative pipeline.
Perfect. Got it. And anything that you can share in terms of -- like any specific -- how many big pharma clients you are engaging with or how many biotechs you are engaging with, any color on the business as it turns today would be helpful?
Some of these are under confidential agreements as you would understand with a lot of innovative space. So yes, we are working with a few and that you would appreciate that it will build in the capabilities and then we will be looking to expanding our platforms.
Next question is from the line of [Suman] from Kotak Securities.
My first question was relating to the one-off case that we have seen in 3Q. So in quantity terms, how much was the one-off gain in 3Q?
Your audio was not at all clear to us. Can you please repeat?
Yes. I wanted to know how much was the one-off gain in the 3Q, in the recent quarter?
Okay, okay. This was pertaining to the recovery of the theft material and the amount was close to INR 70 crores. And the cost related to that growth -- since the cost related to that was already captured in the previous quarter, so this is the onetime gain and this is what we have highlighted also in our communication, close to 300 basis points of EBITDA is on account of this one-off item.
Got it, sir. But sir, in 2Q, you had mentioned that the items lost in transit was worth INR 410 million. So how did we reevaluate this to INR 700 million?
That was cost. Because in the previous quarter, we had accounted for the cost.
The next question is from the line of Nitin Agarwal from DAM Capital.
On the guidance for FY '24, we've earlier talked about 18% to 20% growth for the AgChem business in FY '24. When I look at the numbers, then about 15% for 9 months, sir. So these...
Nitin, sorry to interrupt you. Your audio is not clear at all. Can you please speak through the handset?
Just give me a second. Is it better?
Yes.
Sir, I was saying on the FY '24 guidance, we talked about 18% to 20% growth in the Agrichem business for FY '24, if this is correct. For 9 months, you've done 15%. Sir, how should we look at the full year, more towards the lower end of the guidance?
Yes. We had indicated close to 18% to 20% kind of growth overall today in the pervious quarter. And obviously, the domestic business as explained by Prashant, we will have to see how things pan in the last quarter, but we are still confident given the visibility that we will be able to still achieve the original guideline of 18% to 20%. And to be on a safer side, we will say that yes, on the lower end of this guideline.
And sir, just to be clear, this is only -- our guidance is only for Agchem part of the business, right?
No, I think it was for our overall business.
Including the Pharma?
Yes.
Okay, sir. And sir, secondly, for the quarter on the gross margin, even if we make the adjustment for the one-off item that you talked about, I mean, the gross margins are higher than the previous sort of levels. Anything has changed in this quarter for the gross margins? And how should we look at the sustainable number for this gross margins for the business?
Yes. So we -- basically, we focused on product mix rather than the volume, particularly in the domestic business, okay, where I think the -- there were always choice of kind of saving the volumes by looking at some liberal working capital and also pricing because the price competition was there. But we always focus on quality of revenue and a positive or favorable product mix. And that is the key contributor to this improvement in the EBITDA margin, apart from the one-off that we have seen. Even in our export, we have seen that because of introduction of growth of new products as I was explaining earlier, that has also contributed in improvement in the gross margin as well as EBITDA margin. So going forward, yes, I mean, in terms of EBITDA margins, we believe that around 25%, 26% should be a sustainable level.
The next question is from the line of Vivek Rajamani from Morgan Stanley.
Congratulations on a good set of numbers. Just one clarification before I ask my few questions. You mentioned earlier that over 60% of the growth in this quarter has come from the new products. Am I correct?
Yes.
Sure, sir. Just related to that, the first question was, would it be possible to share what the contribution of these new products will be as a percentage of your overall portfolio today? And where do you see this going, say, by the next 2 years?
Well, I'm afraid we will not have this in front of us. But yes, this quarter growth was more than 60% contributed by these type of products.
Sure, sir. And just one clarification here. When you say new products, that would mean the products that you've been looking on, say, in last maybe 1,2 years? Would that be a fair statement?
Yes, last 3 years.
Okay. Great. And sir, the second question was just in terms of the broader industrial challenges that we've been seeing with respect to the Agchem space generally, are these new products not getting affected in a big way? Would that be a fair statement?
Yes. That is because of the differentiated portfolio that we have been explaining, that we are into early-stage patented molecules or proprietary modules which are not, I mean, I would say, mature products as of now. They are still growing. They are also getting registered in newer countries as they are growing. So it is quite natural that these -- there is natural growth in these products year on year.
Next question is from the line of Vishnu Kumar from Avendus Spark. The line for the participant dropped.
Next question is from the line S. Ramesh from Nirmal Bang.
So in the Pharma business, you have indicated INR 350 million of development expenditure year to date. So can you explain what is the nature of these development expenses? And what is the kind of run rate with respect to, say, in FY '25 and '26 and when do you expect this to kind of reach a steady course and how much will that be?
Well, the development spend in terms of our augmenting reported, in R&D, in business development, in managerial commercial areas, the development spend is also in terms of setting up new systems and processes wherever there is the scope, which we have found during the integration of these different acquired assets. The development spend is also towards lot of infrastructure improvement that we have made or we are making right now.
So this is broadly the nature of the development spend. Now specifically, what will happen in '25, '26, we are still in the process of kind of consolidating and also completing this integration process. Maybe in the next couple of quarters is the time that we will have more clarity and also clear visibility of scale up of this newly acquired businesses.
Yes. Okay. So on the balance sheet details that you have given and the Pharma assets and liabilities, can you share the current assets and current liabilities in Pharma if it's possible?
Yes, that we can share maybe the sideline. These are numbers that you can always get from our team financing.
Yes. So in terms of the Pharma business, there is improvement in terms of your revenue and your -- if you adjust for the Ind AS, there's improvement in the EBITDA. And before development expenditure, EBITDA margins were 16%. So how do you see the revenue run rate for the next 3 to 4 years? And before development expenditure, what is the kind of EBITDA margin you would expect, say, by end of FY '25 and '26?
No, that's what I explained, that while we can certainly give you some answer, but you will have -- rather, we will also have a much better visibility of the scale up and improvement coming through in the next couple of quarters. So maybe by end of next quarter, we will have a much better visibility of what is the revenue scale up and the margin profile that we should be targeting. But just to answer your question in broader terms as we have also indicated in the past, that eventually post this development phase of a couple of years, we would surely expect the EBITDA margins, et cetera, to be on the similar lines as what we see today.
Okay. Sir, one last part on the CSM business. So this entire INR 800 crores, INR 900 crores of CapEx would be on CSM. So while you have in the past said we should not possibly look at the asset turn, but -- and where are these investments going in terms of developing your capabilities? And eventually, what is the kind of incremental growth in revenue one can expect based on this sort of CapEx over the next 2 years?
Yes. So the CapEx, organic growth CapEx is mainly going into capacity expansion and also some of these new technologies, capability building that we are investing in R&D and [indiscernible] and all that. The kind of potential is the similar effect you see today are more than 2 to 2.5. We would surely expect similar kind of asset turns to continue in future as well for this business.
Next question is from the line of [indiscernible] from Ministry of Finance of Oman.
Am I audible?
Yes.
Sir, I just wanted to have a clarification on those news item which came to the entire media about month and half back, relating to some competition in the China building up huge capacity for the products which you are mainly dealing in. And also your client somewhere in Japan is given a guidance of very lower growth of their final output for which you are supplying the input. Any comment or clarification you would like to give because you might assume this one particular news has impacted your seller price quite vigorously. If you wanted to give certain clarification that how you see these news items impacting your business, it will be helpful for the entire investment community?
Sure. In fact, we had given a clarification to this news item if you recall immediately after that news came, okay? But I'll again -- for the interest of the investment community and analysts, I'll again repeat. So yes, as we know that in this industry, products will eventually go generic, okay? And same way, this particular product and subject will also surely go generic. The solo product, the patent is already expired in few countries and in other major countries, it will expire in the next few years, okay? The product will go off within the next few years. But the important point to understand here is that in most of the developed countries, ultimately, the product which is being sold in the market is the formulation, the combination product -- combination formulation product. And most of these combination products have a significantly longer patent life than next few years, okay?
So while the solo product, the AI product patent will expire, say, in next few years, the formulations and the combination formulations, their patent life will be there for next several years after that. And therefore, the impact of the product generalization, while it will be there in the countries the product has gone generic or will go generic in the next 2 years. But in the major market, because of the patent protection of these combinations and formulations, the impact is not going to be as significant as was kind of articulated in that news item, this is the first point.
The second point is that this news item also articulated about the capacity buildup, which is in China with some of the companies, et cetera. Again, this is another point that -- we have always heard this news of overall capacity. But again, there is definitely going to be a time line of capacity building. And since the market opportunity for the generic would be limited because of the first point that I explained, we will have to also see that eventually, what is the kind of capacity which will come in play in next several years.
The third important point for us to also appreciate is that while products go generic or off-patent and many generic players come, but this is also to -- when products go generic, then many players come, the market also grows, the ultimate market, okay? And this particular molecule that we are talking is into certain segments which is a multi billion-dollar segment. And this molecule is still INR 600 million, INR 700 million. So the limited point is that there's huge potential for growth as we believe is there for this molecule in years to come, even when there will be generic competition. And we being one of the major suppliers, manufacturer for the last almost 8, 9 years, we strongly believe that there will be a very strong position that we as a company will have, okay? So that is the fourth point.
The fifth, another very important point for us and also the analysts and investors to appreciate is that PI is not one-product or one-molecule company, okay? We have already explained a few times, that PI is a company with diversified portfolio when you talk about our domestic business as well as our export business. In exports, today, we have more than 20, 22 products. Every year 5 to 6 products are getting commercialized. And these products are now driving growth for the business and the company.
Even in this quarter, more than 60% is contributed by some of these new projects, which were commercialized in the last 2, 3 years. And going forward also, the growth will be driven by many of these newly commercialized products and many of them are actually non-agchem products. So with our diversified portfolio, we are confident that the whole revenue risk or the margin risk which was articulated in that news item is not -- I mean, it's a bit an exaggeration of the real risk that we see. I hope this answers your question.
Yes. It's very, very helpful. Now the things are quite clear. Sir, my second question with respect to your diversification towards this Pharma business, as your results show that the growth is quite -- going quite robust. Just to get an idea, how quickly you have a plan to make this Pharma business quite a bigger part of the total revenue pie? So at the moment, it is quite small. Without going to the very detailed guidance which you may not be able to give, just to give an idea, this diversification drive which we just started few years back, how quickly it will -- it could create a momentum to make certain material difference at your profitability level?
Right, this drive of diversification we have been working for some time, okay? In our export, as we were explaining earlier, that already close to 32%, 35% of our new employees are in new projects that we are commercializing are coming from non-agchem space, because the diversification we are talking. And on top of it, this Pharma diversification will also add to our overall diversification and kind of balancing the overall business segmentation and business growth.
Our estimation for the 4, 5 years is more than 20% to 25% of our company's revenue should be from non-agchem space, obviously, which includes our Pharma as well as the portfolio of non-agchem in our CSM exports. So that is our objective, and we are progressing in that direction. So far, we have a good confidence the way we are progressing. But yes, this is the overall objective we have.
So this 20%, 25% contribution by how many years, sir, 3 years, 4 years?
4 to 5 years, as I said.
4 to 5 years. Sir, the last one, a little smaller part. Because of this Red Sea related problem and the shipping disturbance which is happening, are your company getting impacted due to this happening, which can create problem of the transportation and export into the U.S. side?
So there is certainly some impact in some of the shipments to Europe and U.S. Yes, there is some impact. And accordingly, the supplies are being planned, the costs are being -- obviously, costs have increased in some of the shipments, which have also been discussed and accordingly shared with our customers. But yes, there is -- short answer is, there is certainly some impact.
So the incremental cost relating to this, will you be able to pass on to the customer or it will add on to your expenditure?
No, in most cases, this will be passed on. This is the general understanding we have with our customers.
Next question is from the line of Rohit Nagraj from Centrum Broking Limited.
Congrats on a good set of numbers. So first question is, generally, I understand that we have calendar year contracts. So when we had our negotiations during the last few months, how has been the mode from the global Agchem players in terms of the volume lift up for this calendar year? So are there any delays that we are experiencing or they are still in wait and watch mode? Any comments on that?
Well, that varies from product to product. But in general, I would say, we have not seen any significant change. The kind of products that we are working and operating with our global customers, we have seen good momentum and efforts on concluding, finalizing the businesses for next campaigns or next year.
Sure. Got that. Sir, second question is on Pharma bit. There are 3 sub-questions. One is the onetime development expenditure, is it over or will it continue? The second thing is in terms of the EBITDA and EBIT difference, it seems that there will be interest cost. So how do we justify given that we have cash on our books, why this interest is being paid? And the third thing is we have also shown the segmental results for last year same quarter. So what was the Pharma segment during that time?
So regarding your first question, yes, development spend may continue for maybe a quarter or so because we are still in the process of trying to optimize things and also coming out of the integration process, whatever changes or improvement that we are seeing. So yes, that process will continue for next 1 or 2 quarters. Regarding your second question, I mean, I think it would be good if you connect with our finance team on this finance line items, that would be good. What was your third question, please?
Sir, last year, same quarter also, we have given the bifurcation in terms of segmental data. Last year, I understand we did not have Pharma. So what this particular negative EBIT is particularly you're talking about?
So last year third quarter, we had no Pharma. So that is the reason that the impact that we have seen this year and we have already conveyed that how much is the growth of -- if you see our communication investment presentation -- investor presentation, there, we have already indicated that how much is -- close to 10% is coming from Pharma exports and the rest 13% is coming from our Agchem.
Next question is from the line of Vishnu Kumar from Avendus Spark.
Sir, over the last 3 years, we've more or less doubled our CSM with limited CapEx, I mean, annualizing around INR 300 crores, INR 400 crores. Going forward, as we look for a similar run rate of growth, is this the CapEx similar numbers? Or we have maxed out wherever efficiencies can and we need to probably invest a bit more CapEx? Just some understanding on this.
I'm not too sure on your number of INR 300 crores, INR 400 crores. I think it would have been more because what happens is that there is always a lead in lag in CapEx investment and the revenue coming out of it. So whatever revenue growth that we would have seen in last few years has also come from the investments or CapEx that we would have made maybe 2 years back. And I recall that we made a significant investment in 2, 3 years, earlier 2 years, okay?
But having said so, yes, there were a lot of initiatives that we have taken to improve the throughput of the existing facilities on a continuous basis. I think in last couple of years, every year, 10% to 15% capacity enhancement we have made through improvements in our capacity throughput. Going forward also, as I was indicating to the earlier participant, we anticipate INR 600 crores to INR 800 or INR 800 crores to INR 800-odd crores kind of CapEx every year to keep investing or enhancement of capacity while we would surely be working on further throughput improvement, some of these technologies, such as Flow Chemistry, et cetera, we are already now commercializing few projects and I believe that, that will also help us further improve our overall asset turns in this business.
Maybe Atul, you may want to add something to what I've already said?
Yes, yes. So I think the major focus is on the investment in the technologies in coming years. And of course, we have been continuously working on our capacity utilization of our existing assets by way of improving the efficiency plan, and that's where 10% to 15% capacity is being improved every year basis.
Understood, sir. On one of the previous participants question on margin, you highlighted that we'll probably settle around 25%, 26% on EBITDA margins. This quarter, if you look at the gross margins, there seems to be some significant improvement on the gross margins. And obviously, your overhead investment has probably led to a slightly muted or slightly lower EBITDA compared to what the gross margin is. So looking ahead, when you say 25%, 26%, you expect some pricing cuts from the customers as you go forward in the next year or the investments in overheads will keep you at 25%, 26% because optically, it looks like probably this number can be even more at the current gross level?
Nothing -- I mean, we don't kind of anticipate that for something. But it is also to do with product mix, it is also to do with development spend that we believe we would be making not only into Pharma space but even in Agri input space, the new verticals that we are building such as biologicals and others. So yes, I mean, I would say, it would be good to kind of assume 25%, 26% rather than the quite speculative versus 1 quarter or 6 months kind of results.
Understood, sir. And just one final question on the tax rate guidance you gave for this year and next year -- I mean next year also?
Mani?
Yes. This year, it will be around 14% to 15% for the year kind of thing. Next year, we will be working on the same. Maybe similar range, but we need to confirm in the next quarters.
Sir, this 25% normal rate, when would probably be having the delta from 14% to 15%, will you catch-up for the next 2, 3 years or this 14%, 15% will continue for at least couple of years?
It will continue at least for one more year, but as I said, we need to confirm that with the other computation.
Thank you very much. Ladies and gentlemen, that was the last question for today. I'll now hand the conference over to the management for closing comments.
Thank you. Thank you, gentlemen, for joining on this call. We really appreciate your interest and your support in this growth journey of PI. Thank you so much, and have a good day. Bye-bye. Thank you.
Thank you very much. On behalf of PI Industries Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.