I attended AGM of Omkar Specialty Chemicals yesterday. These are the highlights and transcript of what management said in response to investor questions in the AGM.
Brexit has no effect on OMkar because their exports are to Mainland Europe- Germany, France, Spain etc. Very small export to UK.
Dollar appreciation- Volatility is reduced die to effective hedging. Increasing exports should help hedge further.
GST is good for manufacturing companies.
The company has developed products for Pharma sector- anti diabetic, anti cancer, anti HIV etc products have been developed. These are for life cycle diseases.
On dividends. The focus is on reducing debt at this stage. The plan is to strengthen balance sheet. So dividends payout will remain same for some more time.
Exports- The management guided that for FY17 exports will constitute 30-35% of total sales. The benefits are many. They can reduce finance cost by availing soft interest rate loans, natural hedging for imports, better payment terms etc.
Largest exports happen to Europe. Now trying to get foothold in NZ and Australia. Already trial shipment started. TGA regulatory approval should come by December. In advanced stage.
Omkar works with many innovator companies (MNCs) in to develop advanced intermediates. The specification is given by MNCs and Omkar R&D lab develops the products. Omkar is included in DMF. That means the customer is obligated to source that product from Omkar. This improves business visibility.
There are several barriers to entry in this business- Very R&D and knowledge intensive. Top management need to be very competent technically to take decisions. The company needs good experience to make the chemical processes efficient and improve the yield. As said above DMFs have the name of Omkar so customer stickiness.
There are wide range of products that reduces country, currency etc risks.
The list of customers is large. Top customers gives not more than 6-7% of sales.
The company had taken Rs 200 Cr loan 3 years ago to expand capacity to cater to growing demand. They built the plant but pollution control approval took almost 2 years. Then the pollution control approval came for Unit 5. But another problem cropped up. The combined capacity in the government effluent treatment plan in that industrial estate is 500 MLT. There is no capacity for unit 5 effluents. The govt is increasing its capacity by 1000 MLTs. Omkar is getting priority in that.
The Unit 5 has 4500 MT capacity for next 3-4 years needs. Right now Lasa is sourcing input from Unit 6. The machinery from unit 5 is shifted to Unit 6 and production started there. So Unit 6 will to cater to Lasa till Unit 5 starts production. The management said Lasa sales will not be impacted in FY17 because of this.
Dr. Omkar Herlekar will take charge of Lasa and Mr. Pravin Herlekar will continue with Specialty chemicals. Mr. Omkar answered all queries regarding Lasa. When asked on his interview to Money Control where he had projected Rs. 450 Cr turnover for Lasa in next 4 years…he said he is still confident that that goal is achievable.
Dr. Omkar said Lasa will start producing and marketing Formulations from this year. We will see 25% or so sales coming from formulations in 3-4 years down the line. The ebidta for this business will be 25%. Only those products will be targeted. Dr. Omkar explained the steps they are taking for marketing the formulations. Many pharma sector specific things and I did not understand much.
The management stuck to 15% growth rate. They said they will project realistic growth rate.
After AGM we had one on one with CFO as well as Mr. Pravin etc. They said they will release the pledge as promised. Demerger plan is progressing well. The immediate plan is to strengthen the balance sheet. The entire board looked very optimistic on Lasa’s future potential. By and large We found management down to earth and conservative.
While looking at demerger plan document I found that wives of many directors have invested in Omkar stock. They seem to walk the talk.
I am invested in Omar. My key monitorable is financial savvyness of promoters. Very good technical people. Now they need to become good financial people. Their IR is talking to investors and conveying concerns to the management. The management is intent to understand. Let us see how things unfold in next 6 months till the listing of Lasa supergenerics.
In the last week there was Value Investors meet in Pune. I gave presentation on Omkar Specialty Chemicals in it. You can find the PPT here. Please read the disclaimer very carefully. This is not a Buy Report. The idea is only to share and learn from each other. This platform is for that.
Thanks Girish. In the last conference call, Mr. Pravin Herlekar mentioned that de-pledging will happen partially in September and the rest in October. Wanted to know whether or not they will stick to their commitment of starting in September?
The expectation all along is pledge release by Oct/Nov. Because there is penalty charges. They waiting for period to get over even though they have cash. I asked this pledge question to both Pravin and CFO separately in one on one after AGM. Both said it will be done as promised. Both asked how will demerge will go ahead if pledged shares are not released? Let us see.
Unit 5 production may start next year. Till then UNit 6 will cater. All the unit 5 equipments etc are installed in unit 6 which is nearby. Dr. Omkar said Lasa sales for FY 17 will not suffer because of this. The units are all fungible. My take is they may sacrifice some of their low margin business to keep feeding Lasa if unit 5 does not start. I felt lot is riding on Lasa for them.
Called CFO Mr. Pravin Agarwal. He says majority of it will happen in Oct. and the remaining in Nov.
I asked why not in Sept. as told in conf. call. He says because they don’t have confirmation yet from NBFCs.
I don’t know what that means. It not a big matter (1 month delay here or there) but I am going to take it as a negative that management is not able to stick to its word.
Girish ,
Thanks for sharing .
1.Does the shifting of machinery means the Sales of FY17 & FY18 will be achieved as envisaged by the management earlier ? They had communicated in one of the conference that FY18 would be bumper year .
2.Any time line given by management as when they are expecting unit 5 to start production i.e when govts effluent plant expansion will be done ?
I think partially already done in september earlier it was 72 % & have come down to 66% . The CFO communication I posted few weeks back captures that .
Sales of FY17 will not get impacted. Lasa should reach between 160 and 180.
Production of unit 5 is envisaged to start in 2017. Till then unit 6 will produce. Unit 6 has added 450 MT recently.
The capacity of that common effluent plant is being added by state Govt. So there is some dependency on state govt. But I would like to share one more data point. My presentation in Pune Value Investors meet was attended by couple of fund managers who have invested in Omkar. The IR of Omkar also attended this meet. After presentation I talked to them on this topic. The fund managers have visited all their plants. They also met Mr. Bapat who is associated with that industrial estate. He is senior state govt officer. He promised the fund managers that Omkar will be given priority when capacity is added. In the AGM I questioned Dr. Omkar on unit 5 production and he tinformed that FY17 sales will not get impacted because lot of capacity is commissioned in recent past. And Unit 6 can comfortably cater to Lasa for some time.
I am giving capacity break up in different plants both… Existing + New capacity
Unit 1 600 MT + 300 MT (To be commissioned)
Unit 2 1025 MT
Unit 3 75 MT
Unit 5 0 + 4500 MT (To be commissioned…plant is ready) Unit 6 300 MT + 450 MT (New commissioned)
Unit 7 Pilot capacity
Lasa 600 MT + 100 MT (To be commissioned)
Urdhwa 2800 MT + 0 MT (This is 100% dedicated to Lasa)
So 750 MT capacity is added in this fiscal (excluding Unit 5). Other units have no problems in producing. Their plants are fungible. So any plant can produce any API for final Lasa production. Much of input for Lasa comes from Sp. Chemicals division. E.g. Urdhwa etc.
Looking at above break up I think there is enough capacity for Lasa for time being. And if what fund managers told is any indication then Unit 5 should get priority in next phase when effluent treatment plant is enhanced from 500 MLT to 1500 MLT in a phased manner.
So total capacity for Lasa seems to be 3500 MT at the moment out of 5400 MT current total capacity for entire company. New 5350 MT is being added. Of which 4500 MT seems to be for Lasa again. So next year we may see 8000 MT kind of capacity for Lasa alone if we go by what management is saying in conference calls.
Still I think we should seek clarification on this matter in next conf call-- “FY17 sales is fine but if the production does not start in 2017 also then what is impact on sales of Lasa and sp. Chemicals divisions in FY18?”
Why promoter reducing stake? Does he feel that he will get more return from outside market for his investment rather than from his own company? or any other reason?
Why operating cash flow is negative for FY 16? Is company locking the funds with bad debtors??
This question was debated long ago and explained also I think. Read the conf calls transcripts also.
For demerger to go smoothly they want to release all the pledge. So they sold their shares and raised the necessary funds to pay back the loans from NBFC taken at higher interest rate. Basically loan got replaced - from costly NBFC to promoter loans at 11-12% interest rate. Remaining pledge of 41% will be released in Oct and Nov we are told. Let us see.
Consolidated Operating cashflow is 67 CR. For FY15 year it was 80+ I think. Lasa is very cash generative business because payment terms are 45 days. This year revenue will be around 180 Cr. At 24% ebidta margin the ebidta will be around 44 - 45 Cr I think. Lot of that will be converted to cash.
There is no relevance comparing standlone financials statements with consolidated cash flow statement? . Please comment friend and mention why are you saying did u check consol cash number?
