How did you know, Gambhir Sir? In this market, almost nothing can be kept secret.
Actually, I did not go for inauguration. I went to find out the ground level picture. As it happened, Dr Omkar was not there. And only two of us investors were there. So they asked us to inaugurate.
I am still rattled by the 12 hour car drive to and fro Mumbai. So will write in brief. But in short, a few observations:
- Lot of hunger for growth.
- A committed but simple team, which is sold on to the growth dream.
- Smart, Indian jugaad to get things done.
- Costs kept low; no expenses on unnecessary things. No painting on reactors and no board on the factory. Even the plant walls were barely painted but lot of machines were put in that place. Money was spent on important things. Non-essential staff is on contract basis. So no union issues.
- Found large tracts of adjacent land bought for expansion (probably, some companies were bought). In my view, they can go 1000 crore in this much of land. Needs equipment though.
- Working 3 shifts. Sweating the assets very heavily. While they bought a new expensive SFD (Spin Flash Dryer), they still used the old tray dryers alongside to squeeze some extra output.
- Saw a tearing hurry to get things done with respect to production. Nitin uses the word ‘relentless’ for the execution.
- They make their reactors because companies like GMM and Swiss Glascoats typically take 6 months after ordering. Their in-house production guys just assemble the reactor and get it going in 3 months. At one point, I pointed to an incomplete structure and asked if it will be ready in 2-3 months. The local guy said in Marathi, “come on Wednesday. It will be ready by then”
- I am convinced the new plant operations will increase gross margins and EBIDTA. Along with new production, they are going for backward integration. I saw 3 of their Chiplun plants. One of them (Unit II) makes Halquinol. I saw they had input as 2,4:DCP (2,4-Dichlorophenol), which they bought from Atul. The reactor we inaugurated (they poured 3 bags with labels, catalyst 1, catalyst 2, and raw material inside the reactor, after we broke coconuts and put flowers on the reactor) was actually to make 2,4:DCP. The Halquinol plant head told me proudly that he makes 2,500 kg of Halquinol a day. I saw the bags and drums of them and my estimate was about the same. As per my calculation, that would be about Rs 90 crores of production a year. In the plant II yard, I saw the drums of 2,4-DCP, with labels from Atul. They have bought a JCB to level the grounds but I learned that they were going to use the same JCB to empty out the reactor from plant IV and carry the drum to plant II (which makes Halquinol, which is about 500 meters away from Plant IV), saving on other transport costs. Essentially, with this new reactor, they will have an increase in gross margins as they will save on raw material costs (basically, they will make Atul’s margin). So do not count this reactor for increase in turnover but increase in profitability.
In short, treat this like a complete startup. No fancy presentations, sleek brochures, lovely photographs. No MIS. I doubt how they could give expenses for operative capex with the kind of tearing hurry (“get things done quickly”): if something breaks down, just replace the parts and get things running again in 3 hours, etc.
They clearly have cash crunch. If someone were to hand them 100 crores, I think they would just put all those growth related infra, reactors, storage, QC centre, at one go and ride the growth. Currently, they looked like doing capex using the cash that the business generates. Get some payments, build another reactor, etc. Complete bootstrap operation.
My personal belief, post-visit:
A) They will hit 500 crore in turnover in 3 years, that they have been claiming.
B) There will be a lot of confusing developments along the way.
For my visit, I was expecting to understand about the capacity of various reactors, the plant setups, the pollution issues, the expansion possibilities, like a typical investor would want to.
I came away with a realisation that at this stage of operations, it is impossible to have all those sleek numbers and presentations.
I came out with a firm decision to get out of their way and let them run the way they are planning. I will just keep an eye on the business turnover, EBIDTA, debt and profit numbers. As long as they deliver on the business numbers, I am going to stay put.
Part of my bias comes from my experience when I had started my own business in 1992. We used to completely bootstrap, saving on unnecessary costs and spending a lot on essentials and we had no clue about the breakup of marketing costs versus admin costs, etc. We were growing at 20% a year, facing a cash crunch all the time, and I did not know why we were suffering for cash, with such a growth (it was working capital and capex management, I learned later, being a technocrat). I saw exactly the same thing happening in Lasa, albeit on a larger scale and in a different industry. So I could fully understand when some of their people said they did not know which molecule gave them higher margins, adjusted for production time, labour and capacity.
I also get a the strong feeling that this company’s strength is Dr Omkar, with all the warts everyone has noticed. It should have been obvious to me from the beginning but somehow my scepticism overlooked that. Short of faking numbers, you cannot take a company from 14 crore to 200 crore turnover in 5 years, in a mature field (all molecules and their production technologies are 20-50 years old), without something special.
My judgement is Dr Omkar spends 10-12 hours a day in his lab, figuring out how to make the molecule cheaper and faster using catalytic chemistry. This R&D gives him an edge with much cheaper cost of production. He is able to sell the molecule slightly cheaper than the competitors, because of his higher margins and so is able to capture the market fast. I should have realised that you cannot grab 60% market share of any molecule in 1-2 years without such a strength.
The most important thing, which I gathered when I met Dr Omkar, and this subsequent visit when he was not present (so his people opened out more, perhaps), is he is a master in catalytic chemistry.
People wrongly slot Lasa as an animal API company. Catalytic chemistry can be applied to many chemical molecules from diverse fields. Dr Omkar can take a molecule and figure out, after some R&D, how to make it cheaper and faster using better catalytic process. While the molecule is out of patent (and in India, product patents are invalid), the process patents are valid in India and if he finds a new process to make the molecule, he gets a patent for it and others cannot copy that without breaking the Indian law. He can thrive on that and so Lasa can go into any field, as long as the market is able to offer good margins to him. I have heard he is one of the very few companies in India that is exporting API to China. This is purely because of the cost advantage he gets.
All in all, two risks in Lasa:
- Keyman risk. No one will buy this company, for example, if he cannot buy Dr Omkar.
- Equity Dilution: no idea if the cash crunch will force them to dilute
My first shares of Lasa (bought before demerger) went into LTCG on 24th Nov. Just before I bought them, Girish Deshpande had warned me to be prepared for a roller-coaster ride. I remembered those words as our car passed Imagica (Fame Adlabs’ theme park) en route the plants yesterday. I think this ride will be far more scary than anything Imagica offers, and I believe, far more rewarding.
Disclaimer: 30% of my PF is in Lasa. I intend to stay in it till they deliver on growth and EBIDTA numbers.
Disclaimer 2: I still do not have a lot of answers and some things are confusing, for sure. My personal valuation matrix is 250 cr sales and 25% EBIDTA for FY18. So at 10x EV/EBIDTA, EV of 600 cr. Minus debt of 60 cr, gives me market cap of 540 cr. So fair value for me is about Rs 220. You do your own calculations.