Lactose India - Unique Play on Lactulose & Contract Manufacturer for MNCs

(Nirav8) #21

Hi Thanveer,
Pls read the above thread carefully. If I were to summarize, Lactose India is largely a 3 part story (as of now)…

  1. Significant capex for Kerry for Lactose (from 3500tpa to 11000tpa)…Demand is quite clear here as Kerry intends to put up even more capacity but Lactose India wants to stabilise the existing capex first.

  2. Contract Manufacturer for Sanofi…small but stable cashflow business.

  3. Lactulose capacity of 2400MT/Annum. Lactose India has done 30cr capex for putting up Lactulose. This is better margin business as it is 3rd derivation of Lactose. This business is very interesting (pls try reading up more on this). Impact of Lactulose will largely come in FY17/FY18. Current numbers are largely reflection of stabilization of Lactose for Kerry.

According to me…1&3 points are big game changer for the company. (Pls refer above thread for more)

Yesterday’s quarterly numbers were excellent and showing where company is headed.

  1. Margins continue to expand very smartly (EBIDTA Margins at 45% compared to 29% in previous quarter and 18% same quarter last year). This is big improvement. Even after adjusting for inventory gains & bad debts. Margins are 37% odd.

  2. I believe lactose will be very high ROE, ROCE story. Company’s networth stands at Rs 19cr and if i were to annualise quarterly PAT…ROE can be as high as 38-40%. This is largely because of client funding the capex :slight_smile:

  3. Reduction in Long Term Debt by Rs 3cr was another pleasant surprise. LT now stands at Rs 26cr and ST at Rs 3.7cr.

Lactose India is a very unique play on Lactose/Lactulose with company at inflection point. Delta in numbers should continue to be big and provides extremely lucrative risk/reward. Potential upside can be really big.
Disc - Invested.
Hope that helps.

(Raj Panda) #22

In the Abbott thread saw the mention of Duphalac as an innovative product :smile:

Reminded me that it’s the generic name for lactulose , Made me look up the list of brands using lactulose.

And as one can see in the below link , there are 79 companies selling this drug in India and they are all using lactulose.

One missing part of the puzzle though, which other companies are making the basic lactulose solution (product from Lactose India) in India ? (not the finished dosage like what we see in the link above).
Any ideas ?

(rajiv goel) #23

Taj pharma manufactures on order

(Raj Panda) #24

Checked their website,
Still get the impression that they are selling the finished dosage, not the bulk lactulose solution which Lactose India is going to produce.

To see the difference check these 2 links, note the unit field.

We are mostly importing lactulose solution in bulk (by tonnes) and selling them in btl (100/200 ML), tablet forms etc.

(Dhiraj Dave) #25

I would appreciate if you can explain us for such a low RM cost. In fact in Q2, if we adjust inventory increase, net cost of RM is 4 as against total sales of 97! Such kind of value addition can happen only in fraud or real jewel. Not sure but need more understanding about same. I have gone through Audit report for FY15, no where company has mentioned about its input. Also, some issue about getting in advance revenue for capacity lending/building from MNCs. While per se do not see problem as give indication of strong bargaining power, but fail to understand Q2 result. Would appreciate if you can give some idea about raw material, input output norm, market price of end product and raw material as nothing is available in annual report.

Discl: No investment

(Raj Panda) #26

Hi Dhiraj,

Regarding the market price for end product, one of the reliable source i could find is zauba. It shows 46/kg as rate for imports and i think the duty of 47% is above this price. I am also scratching my head on the input raw material and price.
Same way you can check the lactulose solution price, it comes to roughly 3$/kg and 26% duty.

Another thing am thinking is, can we take a guidance of lower than last 4 quarter’s EBITDA margins like 20% and see if the company still has value at current market price.
AR has hardly any information so it’s been really difficult to get more details on raw material pricing etc.

It will be great if we can find a way to reach management for more queries.

(Raj Panda) #27

Disc: Invested from lower levels.

(Balajirp) #28

Has the current price of the stock has already weighed in the future earnings or is this still waiting for a rerating. I am late in game. Can i still get in for a long haul ? Thoughts ?


(Anand Bhushan) #29

Whats the problem with the script…? anyone have any idea…

(P Sharma) #30

This one looks interesting. This is a case of the company expanding the lactose facilities, earning the conversion charges from Kerry and utilising the cash flows to get into the lactulose market.

Given the arrangement with Kerry, the lactose segment would be an asset light model with periodic fixed asset charges for expansion.

The lactulose market looks interesting. From the import figures the rough guesstimate is that India is importing 2200-2400 tonnes per annum of lactulose. This seems to be primarily from Fresinus Kabi plants in Austria and Italy and Danipharm from Denmark. There also seem to be some shipments from the UK.

The question is what is the market size of lactulose in India and if the market can absorb the increased capacity. If the usage doesn’t go up, then it is a case of import substitution. Does anyone have pointers to the global market size and key players? Is it possible for Lactose India to export lactulose given the cost advantage if any.

At around $3.75 landed cost for lactulose, the peak revenue for the company would be around 60 crs before they need to expand again.

I think we need to dig deeper into the lactulose market dynamics before a decision can be taken.

The trading behaviour of this scrip looks very strange with no sellers but a single buy order at UC for a few lakh shares. The usual traded volume was a few thousand shares not very long ago. Better watch out

Disc- Not invested

(Nirav8) #31

Couple of pointers…

  1. Company isn’t using cash flows from kerry (through lactose sale) for setting up Lactulose capacity. Numbers from Capex has just started flowing through and should keep improving sharply over couple of years.
  2. Lactulose Capacity has been largely put up through debt (Long Term debt increased from Rs 4.7cr in FY13 to Rs 29cr in FY15.

I had attended the AGM (was among 3-4 shareholders who attended ;-))…What I could gather from Atul Maheshwari (MD)…Lactulose market is very exciting given application of the same and company has put up capacity after insistence from the clients. You are right sales from Lactulose will be around Rs 60cr. Demand it seems is largely tied up. I have no idea about whether Lactulose will be sold domestically or exported.
Since company has expanded massively given its size, it would like to stabilize current capex initially. Management had indicated that Kerry has asked them to put up more lactose capacity. To get more idea about Lactulose beyond what capacity has already been put up, one should try meeting the management. What I could gather from secondary sources is Lactulose is niche market.
Hope this helps.
Disc - Invested.

(Raj Panda) #32

Lactulose market is indeed very interesting. Globally, as per some literature, there are 9 major producers and you are right Fresenius and Danipharm are 2 from that list and seems we are importing major qty from them.

If we search on alibaba there are many lactulose producers in china. But this is a milk derivative and as we know china is suspected of poor quality in diary products. So I think that could be part of the reason why China is not trusted for lactulose, while we probably import roughly 80% of other API’s from them.

India is a mostly importing bulk lactulose (by tonnes), while exporting it form of small dosages like tablets and small bottles. Plus, lactulose has a wide non-pharma use, mostly as a food additive.
So, my guess is, mgmt. got this idea of getting into lactulose production based on their association with Kerry. Kerry after all is one of the world’s largest food ingredient producer. I think the usage must be going up for lactulose as it’s used for infant formula, pet food, yoghurt, beverages etc…which are mostly growing segments.

Searching for lactulose producers in India , leads to vague results, so am assuming there no producers currently and there is a strong case for import substitution.

It’s been UC since the Q2 results were declared :frowning: , would have liked to add more below 60.

Nirav already answered your questions on the usage of cash flow from lactose facility.

Disc: Invested before the Q2 results.

(P Sharma) #33

Thanks for your comments Nirav. I know that the lactulose facility is funded by debt. What I mean is that going forward, the cash flow from the lactose plant can be used to service this debt.

Lactulose in the formulation form is being made by almost every company under the sun. It is the bulk space where Lactose India competes and we need to determine if it really is niche and that is what we need to figure out. What makes it niche- is it access to process technology, raw material access or something else.

(P Sharma) #34

Thanks Raj for the info. The Kerry connect is a good one. As you suggest, it is quite possible that Kerry encouraged Lactose India to put up the lactulose facility.

The interesting thing about the manufacturers is that none of them seem to be in the Americas. This seems very strange and there is no information available.

Morinaga - Japan
Solvay - Brussels
Inalco- Italy
Fresinus Kabi - Italy and Austria
Relax Biopac- Based in Malta but the plant is in Durban SA
Danipharm- Denmark
Chephasaar - Germany

US is a large milk producer and i am sure there would be large manufacturers there.

Lactulose it seems travels easily and the shelf life can be 3-4 years. Would be great to get the overall demand and supply picture.

(Raj Panda) #35

Very logical that there should be producers in US. But my search on American Diary products institute website and google didn’t yield any results,so not sure what’s missing.

Actually the raw material for lactose/lactulose production (whey permeate solids) is considered as a typical waste product when cheese is produced from milk. The waste normally goes into effluent treat system unless used for producing derivatives such as lactose/lactulose. Attaching the file with more data on this.

As of 2007, the global market size for lactulose as per attached reports was 25000 - 35000 MT. If we assume the capacity and market size has doubled in last 8 years to 50k Mt to 70k MT, Lactose India’s lactulose production capacity represents about 3-5% of global capacity. Sounds very significant to me.

There are some consulting firms which sell very latest reports on lactose and lactulose market. But they are selling the reports very costly for me to afford.Uploading…

(Raj Panda) #36

Sorry. Seems the file is large to be uploaded here.

(Nirav8) #37

Yes Raj same info I got on net…2007 report which states 25000MT capacity then :-). Other reports are pretty expensive.

(Raj Panda) #38

Crisil updates Lactose India’s BG, Bill discounting and credit line.

Given lactose India’s huge debt, good to see this.

(Priyaranjan Mahto) #39

As per Latest Import data, India is importing majority of Lactulose from AUSTRIA, GERMANY and ITALY @ prices varied from rs.170 per kg. to rs. 200 per kg.So, production capacity of 4200 MT P.A. of Lactulose of the company can generate revenue of 71.40 crores in a year @ rs. 170 per kg. Link

Similarly, Latest Export data reveals that India is exporting Lactose @ prices varied from rs. 62 per kg. to rs. 220/- per kg.So, production capacity of 11000 MT P.A. of Lactose of the company can generate revenue of 68 crores @ rs. 62 per kg. in a year. Link

so, LACTOSE INDIA is capable of generating 134 crs of Turnover ia a year on a conservative basis.

DISCLOSURE:-- Invested.

(saurabh shankar) #40

thanks priyaranjan. I think the bigger question is irrespective of
lactulose price, what is the price at which lactose can sell? if it doesn’t
have pricing power then this assumption that they will be able to sell at
these prices only can be risky. what if prices fall?

Disc- not invested.