Co seems to follow an IP led approach.shud be studied furtehr
This interview further talks about why OSCL went into the API segment. The summary of the article is that the growth in API space in the coming 2-3 years would be high given a lot of drugs are coming off-patent. India is rapidly catching up in the API space both in scale as well as quality.
The following statement is pretty interesting:
Small and medium-sized Indian API and bulk drug manufacturers like OSCL have been targeting small and niche segments and have garnered substantial market shares in some advanced as well as emerging markets, effectively competing with larger Chinese and European counterparts on quality as well as scale in the high-margin/ low-volume complex chemical products where completion is less. - See more at:
Product portfolios with higher share of recently patent-expired drugs enjoy higher margins compared to older commoditised drugs. Higher share of exports to profitable US and European markets imply better margins. In order to keep abreast with the changes, OSCL has targeted niche segments to garner a large market shares in the emerging markets and effectively compete with the Chinese and European counterparts on quality as well as scale.
OSCL has also adopted various novel technologies to reduce the processing time as well as to yield more production.
Two key take-aways for me from the interview:
- Vet API largely goes to de-regulated markets - Does it mean that the the margins should be low?
- Growth in Vet API seems stellar. He is saying that the market is itself growing @ 25% and he will top that.
Broadly, the sense I am getting is that these guys seem to get into niche intermediate chemicals/molecules and then slowly transition to become the API mfg too for that intermediate (this is my hypothesis and not a take-away from my interview)
Is it a case of them selecting the right products and then just milking it before moving to the next product? Am I simplifying it too much?
You may also want to look at NGL fine chemicals… Listed vet api focused peer…
http://www.derivatives.capitaline.com/newsdetails.aspx?sno=774807&opt=hp&secid=3&subsecid=110&SelDt=
Also part of Forbes best under a billion 2015 list
Disclosure: not invested
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Thanks Crazymama for the link. Very informative piece on the Vet API business.
- Margins are usually 15-15.5%. Disease outbreaks etc creates imbalances which causes margins to shoot up. Its important to understand the margins in API space for Omkar to draw any conclusions about the product profile. On a consol level these guys make a margin of ~20% and they believe they can sustain it.
- Working capital intensive business and usually a seasonal business around Q4.
- Sales are majorly to non-regulated markets - this was confirmed in the above interview of Omkar Halrekar in NDTV/CNBC
Forgot to add a disclosure
Discl: No holdings in the company yet.
Can some help me to understand why company is doubling the capacity as the Current capacity utilization is 65%,
It was an exhaustive 90 minute concall by the company organized in Intercontinental Hotel Mumbai. No, I did not attend it, however listened to the recording on researchbytes, along with the presentation available on the company’s site (http://www.omkarchemicals.com/cs%20pdf/Omkar-Corporate-Presentation.pdf). Some slides are missing however from the presentation the company gave in the analyst meet.
Summarizing a few points.
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The company has more than 850 customers. Largest is not more than 2% of sales. No concentration
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There were Zero rejections in 2015 which is rare as per the management. Shows their Quality consciousness
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More than 60 iodine derivatives. Diversified product basket. They gave detailed explanation of their product lines – commoditized iodine derivatives, specialized iodine derivatives, selenium derivatives, intermediates (which they manufacture according to the needs to their principals), API, resolving agents etc.
Working capital cycle / NWA related
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75 days transit time of iodine (from Japan and Chile) to reduce to 24 hours as suppliers have set up warehouse in Nava Sheva port.
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Receivables from iodine derivatives reduced from 90-120 days to 30-60 days. Quality and competitive price enables them to get these terms.
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There are now 12 iodine miners in Chile compared to 2 earlier thus reducing supplier concentration.
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Iodine inventory of 25 days is maintained.
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As on 30th June receivables are 93cr, inventory is 79cr and payable is 61cr. NWA works out to 111 days of Q1 sales (annualised).
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NWA to reduce to 75-90 days. Downward trend is visible from the presentation slide.
Q1 performance related
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Q1 has trading income 40 cr against cost of 38 cr. This income is related to test marketing of products that the Company intends to manufacture and launch this year. Facilities for this are fully erected. Environment clearance is awaited. Expected by sep-oct. So manufacturing will commence in Q3.
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Margin in trading is only 5-6%. Once these products are manufactured in-house their EBIDTA margin will be 28-30%. Q1 blended EBIDTA margin is 18% comprising 5% from trading and 30% from manufacturing (they stated EBIDTA value of 15-16cr on manufacturing Sales of 50cr)
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5 years back export was 5% of Sales. Currently 30%. FY16 and 17 expectation of 40% and 50%. Working capital cycle is lesser in exports. Also they can get been funding by discounting of receivables. Going forward export growth rates would be higher than domestic
Debt / capex
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Current term debt and Working capital debt is 185 cr. Term loan repayment of 20 cr will be done this year.
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They have enabling resolution taken in Aug14 of QIP of 125 cr which will be done based on requirement and on market condition. Since capex could not wait for market condition to improve they borrowed funds. If QIP is done part of it will be used to retire debt.
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Volumetric Capacity is currently 5250 MT which will increase to 8000MT in 2016 and 9500MT by 2018. Sales potential on this enlarged capacity is 750cr.
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Unit 1 capacity to increase from 600MT to 900MT this year
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Unit V from Nil to 3000MT in 2016 and to 4500 MT in 2017
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Unit VI from 300MT to 750MT this year
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Lasa (API) capacity from 450MT to 600MT this year
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All capex is complete. CWIP is 105 cr which will reflect as fixed assets this year. New capex is 10-15 cr (balancing equipment) plus routine annual maintenance capex.
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Setting up warehouse in Antwerp to aid logistics and reduce transportation costs. APIs are ordered by customers in smaller quantities but in several tranches. Company will do bulk shipping to this warehouse and then distribute within Europe from there.
Depreciation
Depreciation increased in last Q4-15 because they provided additional Depreciation on machines which handle hazardous chemicals and whose life was lesser than others. Not sure whether this is one time. Because Q1 depreciation was lower. Management needs to be queried on this more.
API / Patents
API growth to be 100% in FY16 and 30-40% in 17 and 18. 2 products to be launched in 2016 and 2 more in 2017 (all are being test marketed currently)
Vetinerary API market is 4500cr. There are 3-4 major vet API manufacturers in the world (need to independently verify this). Omkar’s vet API is 85% of their total API which in turn is 30% of their total sales.
API facility has EDQM approval. USFDA not needed since they are not supplying to USA. European certification is sufficient for their other export markets. API order book is 150cr of which 40% is export.
In all co has filed 18 patent applications over APIs and intermediates. 2 approvals received. 3rd is expected shortly. Exclusivity period starts from the date of filing the application.
Selection criteria for APIs are that they should be fast moving (ready market, no new molecules), high volume (large customers base), high cost (should work out to be profitable), generic, more complex ( not bulk drug variety).
Minimum yield improvement from the new process should be 15-20%. Only then patent is filed for the process. And Only then it would be of interest for the customer to switch from his existing supplier. They start from scratch to develop completely New process for manufacturing the API.
Cost our filing a patent is 2Lakh. Total investment is 5cr in form our fixed assets for these patent applications ( already incurred)
Pledged shares
There was no discussion regarding the notes that continue to appear in the Financials. However Praveen and Omkar confirmed that the shares were pledged to take loans for use by the company. Omkar even said that they are very confident about the prospects of the company and are not worried about using their shares to get loans for company use. They therefore did not see any threat in pledging their shares.
Regarding promoters (my feeling when listening to the concall)
Father (Praveen) and son (Omkar) are educated from UDCT Mumbai (now known as Institute of Chemical Technology). Son has done management degree as well
Son spoke with lot of energy and enthusiasm. Could also detect that he was proud of his achievements. Came across as having very good technical knowledge and clarity of thoughts. But was too bullish for comfort. Like someone giving an aggressive Sales pitch. In his excitement he may have overstated a few things such as market/sales growth targets/capabilities/potential etc. but i dont have any concrete reason for not believing him, albeit with some salt. Father was more subdued and moderate.
Key drivers to monitor:
- API business growth
- Timely commercialisation of the expanded facilities
- Reduction in working capital cycle
Disclosure – I hold some shares bought 2 months back. May add/reduce more depending on how the story pans out. This is not a recommendation.
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Omkar Q1 EBIDTA calculations.xlsx (12.4 KB)
I am a little doubtful (skeptical would be a strong word) about the EBIDTA margins that they are generating from the manufacturing activity (excluding trading business). I have done some calculations (file attached) which indicates that Standalone EBIDTA margin from manufacturing activity in Q1 is 27.2%. Consolidated EBIDTA margin from Manufacturing activity is 30.5% and Consolidated minus Standalone, which represents business in Urdhwa and Lasa (API) is 33.7%.
These figures appear quite high for an API manufacturer, although I admit that I don’t have any comparative figures to base my “feeling” on. Are such margins possible in this business?
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UDCT is a top notch instt specially for chemical engg. Indias no 1 and amongst worlds top 4-5 .Mukesh Ambani n mR parekh of Pidilite passed out from it besides a host of other luminaries. Mukesh Ambani donates 5 Crore every year to it further strengthening its educational edge
Father Pravin is from IIT & if son Omkar is from UDCT it further enhances the confidence in the co specially from R & D perspective.
These guys knows their subject well.30 scientists deployed in R & D gives them a major edge and moat.No wonder their margins are on the higher side.
Co is set to move into another orbit once approval for Chiplun Unit is received.Whats the status on it Vinay?the delay in approval so far has led to underperformance vs projections.
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Apologies as I wrote that Praveen is also from UDCT. He is from IIT Bombay and Managment degree holder from Mumbai University. Omkar has a PhD from UDCT.
Like I mentioned, Omkar came across as someone very technically sound (he gave gyaan on isomers - useful and useless, benezene derivatives etc) and highly research oriented. He said that he goes direct to the scratch for any API manufacture process and comes out with a radically new process by using new catalysts (his speciality apparently is Catalyst designing). All processes are developed in house by him. He has taken Lasa from 1cr topline in 2013 (when they acquired it) to 51 cr topline in 2015. Only negative was that he sounded very aggressive and bullish and proud, but perhaps justifiably so.
The new unit is waiting for environment clearance. They have had 2 meetings with the related committee and have in-principle approval. By the time the formal clearance comes about, it could be Sep or Oct according to them. Hence manufacturing will start not before Q3. However the facility is fully constructed, all machines ready, everything erected. They will commission as soon as approval is received.
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http://www.omkarchemicals.com/cs%20pdf/Omkar-Corporate-Presentation.pdf
It seems R & D is the DNA of OSCL thanks to IITian Founder and his UDCTian son.This organization seems an IP & patent led organization.
Seems a reputed FII specialising in small caps DRIEHAUS has entered OSCL.they have a stellar track record n hv been holding Strides Aroclabs n SKS Micro since long.
SBI MF,Birla Sunlife n Axis bank are other instt holders in OSCL for long.
SBI, the biggest institutional shareholder of the company, was selling shares in the open market, thus keeping a lid on the price rise.
http://www.moneycontrol.com/stocks/reports/omkar-special-disclosures-under-reg-292sebi-sast-regulations-2011-1268441.html
Entry of a new institution has taken that lid out. The share jumped by 14% today.
SBI MF i think still holds a substantial chunk of 5%.
Company seems to be on right patent n IP led track.R & D should be the moat for them
discl invested recently and also bought today
U WERE correct Gyan.
SBI MF has sold out.Driehaus has entered.This seems to be a v prudent early picker of quality small caps as they bought into Kaveri seeds 2-3 years back.
Their other picks also seems great with quality cos like Eicher,CARE,CCL,Kitex,Symphony,Wonderla,Yes Bank,Wabco and others .
All in all comforting feeling of a quality stock picker has entered the co
The way the shares were available at 185 on 27th July, it was very clear that someone big was selling. I think along with SBI some other Corporate Body type investors have also exited in last 1 week. roughly 7-8% of equity has changed hands and my guess is that it has gone into longer term hands from short term hands.
Disclosure - Invested.
Why are the promoters pledging their shares ?
My concerns on this
- Why should promoter pledge his shares for companies sake. Isnt the company strong enough to borrow on its own merit with own assets and cash flow. If not, they shouldnt borrow
- The quality of the lender is also bottom of the barrel. When there are so many quality lenders available, why borrow from Venus India Asset-Finance Pvt. Ltd. Am sure their costs of funds would be much higher and thus logically the cost of lending would be higher than the market.
Discl :am invested
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