IOLCP - Synergy in operations made monopoly in product integration

Stock Opportunities Untested - but worth a good look
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IOL Chemical & Pharmaceuticals ,Company primarily operating in 2 verticals Speciality Chemicals & Active Pharma Ingredients.

The Specialty Chemicals division produces Ethyl Acetate (87000 TPA), Iso Butyl Benzene (9000 TPA),MCA (7200 TPA),Acetyl Chloride (5200 TPA) for use in a variety of end products like flexible packaging, pharmaceuticals, textiles, food processing, pesticides and paint industries.

Active Pharma Ingredients (API) division in Pain Management(Ibuprofen with installed capacity of 6200 TPA) and its derivative and salts, in Life Style Drugs (Metformin Hyderochloride, Lamotrigine, Fenofibrate etc) are developed for commercial distribution across the globe. Presently, 6 API’s are already commercialized and 10 API’s are in the advance stage of development.

API segment journey
Initially started with Mono-chloro Acetic Acid (MCA) and Acetyl Chloride as raw materials for pharmaceutical product called Ibuprofen. Later As part of Backward Integration plan, IOLCP commenced a new plant of Isobutyl Benzene (IBB) having annual capacity of 6000 MT to ensure ready availability for important raw material of Ibuprofen. With this company became World’s only integrated Ibuprofen plant. Subsequently the plant is approved by USFDA, EUGMP agencies.

Similarly company completed a co-generation plant of 17MW to meet the energy demands of its production units. company completed these plant setup / capacity expansions with an investment outlay of Rs.256 crore.

Currently the plant is running with 60% capacity utilization, no fresh investment is required for further capacity utilization.

The backward integration with specialty chemical products will facilitate the company to be more cost effective in the production of Ibuprofen will not need to depend upon suppliers for the raw material and price trends.

Players like Vivimid, Shasun or Granules India has to depend on IOL CP or Jubilant Chemicals for ordering the Raw material for preparation of IBUPROFEN.

Siting strong demand growth for ibuprofen , BASF is setting europe’s first plant in germany with a cost of 200 million euros which is operational by 2021.
https://www.basf.com/en/company/news-and-media/news-releases/2017/06/p-17-260.html

Good clientele:
The company has strong business relationships with a number of prestigious clients such as Ranbaxy Labs, Dr Reddy, DS Group, CIPLA, Uflex Industries, ITC Limited, ICI Paints, Asian Paints, Pidilite, Rallis India, Hindustan Polymide, Gujarat Super Phosphate, and Avon Organics Ltd.

Financials:

Positives:

  1. One of the Primary reason for investing in this stock is turn around in financials from a loss of -66cr in 2015 to -40cr in 2016 to +4cr profit in 2017 .
  2. Margin expansion(9% to 15%) coupled with increased top line (580cr to 711cr) YoY.
  3. Strong product growth globally for Ibuprofen (where company is getting 18% margins from this segment without any fresh capex considering 60% plant capacity utilization), in fact company reported 6 straight quarters of increased top line.
  4. Management acumen in turning round the chemical products business from 40cr loss to 4 cr loss this year.
  5. Company success in Latin America is going to be replicated in Europe with recent EUGMP certification.
    http://www.bseindia.com/xml-data/corpfiling/AttachHis/a55d52c1-f0ed-449f-acab-b12cdaa43b35.pdf
  6. The synergy in business verticals made it possible for the management to built pharma plant, moving away from traditional chemical business to high margin pharma segment. Any new player to venture in plant setup and integration will take 4+ years time (Even world major BASF europe plant estimated time).
  7. Promoter increased the stake from 39% to 41%.

Negatives:

  1. High debt on books, D/E ratio of 2.4 is very high ,though recently CARE upgraded long term borrowings on account of improved financials. This is the main reason for undervaluation of company i feel currently.
  2. Equity dilution in 2015.
  3. High inventory to support the pharma operations.

Investment theme: Classical case of turnaround of a company where one division is loss making versus the other which is profit making. Slowly the loss making unit will trim the losses and subsequently market players rewarding with market capital of company same as sales over a period of time.

Disclosure: Invested recently, currently stock price is trading at 63rs.

14 Likes
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Hi Chaitanya, I have been watching this stock for the last 2-3months.
The Q1FY18 was good as well, the debt has reduced from Q-O-Q basis.

Betting on the turnaround story and the demand of Ibuprofen.
Looking for senior members to throw some light on this stock.

Disclaimer : Invested for tracking purpose
New member and new to stock market investment as well.

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Hi Chaitanya - Are you still tracking this stock? as the stock is down quite a bit in the last couple of days.

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Weakness got much adverse with overall mkt sentiments clubbed with one of major stakeholder FII (Indiastar Mauritious) sold 2–3 % stake in open market. For me this is an opportunity to keep accumulating. Its a risky bet hence suggest QoQ results tracking and related news.

Disc : Invested at a price higher than the current one. And accumulating.

1 Like
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Hi Zoro, nice to see someone else in the forum also invested in this stock :slightly_smiling_face: as there was no action on this thread.

My rationale is on the demand of ibuprofen and IOLCP being a major player in the space. May I know your rationale on this stock.

I have been following it up and Q-O-Q and Q1 looked better although a long way to go to come out of debt.
Looking forward for their Q2 number.

Disc : Invested and accumalating

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@pandi.rao even I have similar rational , I feel in next couple of years once company retires some debt then it can give excellent returns. For me its a very small position , about 1 % of my portfolio. However I am slowly accumulating so I am actually happy seeing the price being under pressure :slight_smile:

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The problem is with the RPT as purchases from related parties have substantially gone up in 2016-17 one can smell that the company has started making good amount of profits but good corporate governance is a mater of concern.

Invested.

1 Like
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Hi Raminder, Can you please let me know what does RPT mean , I am a beginner and have limited knowledge on financial terms.

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RPT, I think Related Party Transactions.

Hi Rajjal, may u please elaborate the concerns about RPT , as u Analyzed also the reason for thinking that company is making good profit.

Rgds

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Rpt refers to related party transactions and in this case purchases from
related parties have substantially gone also in 2016- 17 when the company
has indicated of turn around in operations. Also promoters are increasing
their salaries in the middle of their tenure . Three members of promoters
are drawing over 5cr. and are further increasing their salaries.

1 Like
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Hi Raminder, May I know the source of the data, is it available in the AR -2016 as I cant see the AR published for 2017.

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Yes, Comparative nos of FY 15-16 are also there in AR of 2016-17

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Thanks Raminder, can you please send me the link of the AR as I cant see them in the BSE website.

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http://www.iolcp.com/mycgi/iolcp-com/upload_file/Annual_Report_2016-2017.pdf

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Excellent numbers for Q2

image

Pay special attention to notes:

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image1907×390 120 KB

Disc : Small position , planning to increase as the story unfolds…

3 Likes
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Yes the result has been consistent every quarter with net profit improving. The only issue is the debt, looks like a promising company.

Disc : Invested

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I read from the broker research report(http://www.moneycontrol.com/news_html_files/news_attachment/2017/IOL-CHEMICALS-23112017.pdf) about Ibuprofen prices and its impact on future earnings potential of IOLCP

  1. IOLCP is the second largest producer of Ibuprofen
  2. In FY17 Ibuprofen accounted for 80% of pharma sales (Pharma business is 55% of total revenue)
  3. In last 6 months Ibuprofen prices increased by 25-40% by around 65-75 per kg.
  4. IOLCP is geared up for further expansion of Ibuprofen capacities

Is there any place to track the prices(global/domestic) of Ibuprofen ?

Disc : not invested due to 2.4x D/E ratio but tracking.

2 Likes
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Hi

Few Questions

  1. Who is the largest producer of ibuprofen and how does it compare with IOLCP? Is their any entry barrier to this product as its a largely commodity chemical (news is that BASF is planning to setup a new ibuprofen plant soon https://www.biopharmadive.com/news/basf-ibuprofen-production-200-million-investment/446176/) further Granules also claims it is a large ibuprofen manufacturer (http://www.moneycontrol.com/news/business/companies/ibuprofen-to-add-usd-2-4-mn-to-revenue-granules-india--1494839.html; http://www.motilaloswal.com/site/rreports/636310421180066497.pdf)

  2. What is the level of integration that IOLCP has in maufacturing ibuprofen? is it still RM supplier or is also into ibuprofen API?

  3. Isnt there a risk on sole reliance of a single product? Globally ibuprofen usages are being curtailed as it has been proven to show lots of side effects (https://www.theguardian.com/society/2017/mar/15/ibuprofen-sale-restrictions-study-increased-cardiac-arrest-risk;
    http://www.collective-evolution.com/2017/03/17/scientists-call-for-restrictions-on-ibuprofen-other-over-the-counter-painkillers-after-deadly-risks-discovered/)

Regards

2 Likes
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I studied IOLCP and than discussed with some friend about it. I was convinced with undervaluation play it was offering at around rupees 220 crore marketcap. Good operational improvement at pharma side, promoters positive commentary, capacity expansion move, talk of sale of loss making chemical business, positive cash flow from operation and some more positive coverage initiated lately. What caught my eye was the disproportionate increase in the management remuneration, high depreciation cost, no effort to decrease the debt level, sale of shares in open market by its largest institutional investor, increasing receivable days and never improving Asset turnover ratio. One point made to me by my friend was it is capitalizing its expenses which is also not good sign. Net block of the company is decreasing despite capex, receivables are increasing and other assets are increasing very fast. All above thought deterred me to invest in it. Although it has became a doubler from that point. No regrets though. I am learning and cant afford to make mistakes as this stage of my learning path.

Discl: Not invested here my comments may be biased.

6 Likes
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There is a news that government may ban contract manufacturing which can adversely impact company s business as 55% of revenue comes from pharma business.