Neogen Chemicals - Niche player in specialty chemicals

Background / Overview

  • Was set up in 1991 – came up with IPO in June last year. IPO was oversubscribed by 41 times
  • One of the largest manufacturers of bromine derivatives & lithium salts in India
  • Has a diversified range of 205 products in pharmaceutical & agro chemical intermediates
  • Strong R & D capabilities with dedicated in-house team. (10% of workforce in R & D)
  • Promoters are pioneering technocrats with substantial domain expertise (chemical engineering background); cumulative experience of more than six decades.

Business verticals
The company operates in 3 business segments

  1. Manufacturing of organic chemicals (Producing bromine-based and other value-added advanced intermediaries)
  2. Manufacturing of inorganic chemicals (Producing inorganic Lithium based chemicals)
  3. Custom synthesis and manufacturing

End user industries

  1. For Organic chemicals : Pharma, Agro chem, Aroma Chemicals, Favours
  2. For inorganic : Engineering companies (eg: Voltas, etc), pharma, specialty polymers, construction chemicals, etc
  • Derives more than 80% of revenue from pharma & agrochemical industries

In-house capabilities

  1. Company has R&D expertise supported by two state-of-the-art R&D facilities
  2. 10% of workforce is in R & D. Total employees: around 240

Manufacturing capabilities

  • It has 2 plants – 1 at Mahape and 1 at Vadodara.
  • Upcoming unit in Dahej SEZ – which will build additional capacity

Revenue split (domestic vs exports)

  • 64% revenue from domestic and 36% from exports as of FY 20
  • Has been exporting to 27 countries.

High entry barriers

  • Among handful of companies having expertise in the niche and specialised business area of bromine and lithium-based compounds
  • Products necessitate meeting stringent quality and impurity specifications

Raw material sourcing

  • For bromine – 75% to 80% sourcing is in India. Rest from Israel, Jordan & US. Company has stated in con-calls that Bromine is a bulk commodity. So there is no bargaining power as such for the suppliers.
  • Lithium – Mainly from Argentina, Chile – Three suppliers there, who are world’s top 3 lithium producers

Stable relations with suppliers

  • 10+ years of strong relationships with bromine and lithium producers
  • Product supply and price stability


  • Clientele - Pharma clients include Sun Pharma, Hikal, Divis, Mylan, etc. Engineering – Voltas, Kirloskar, Austin, etc
  • 70% business comes from customers who have been there for more than 5 years / long term stable relations with customers.

Capacity utilization – 80 to 85% utilization.
Two major capacity expansion planned:

  • 12,00, 000 kg inorganic specialty chemical greenfield project in Dahej SEZ. Has been operational recently.
  • 1,26,000 litres organic reactor capacity . Will be operational by end of this FY. This will double their capacity for organic.
  • With this doubling of capacity expects to generate revenue of close to 450 cr in FY22
  • Capacity expansion for inorganic is completed and the capex amount of approx. 15 cr was through internal accruals
  • Capex amount for organic this FY is likely to be around 75 to 80 cr .


  • Second half of year (H2) is usually better than H1 (Apr to Sep), owing to strong demand from Europe in 2nd half of the year – orders tend to scale up in latter part of the year. Lithium based chemical demand tends to be strong in Q4 as demand from Ventilation & AC segment is linked to capital expenditure that enjoys 100% depreciation benefits for air-conditioning/cooling machines.
  • Therefore results not comparable on QoQ basis to an extent. However they have more or less maintained their operating margins – last 4 quarters

Forward integration

  • Company has been trying to leverage expertise and innovation capabilities to forward integrate
  • And enter areas of custom synthesis and contract manufacturing to provide more value-added products and services to customers.

Competition - Most of their competitors are based in Europe, Japan and China


  • Last 5 years Revenue CAGR: 29%
  • Last 5 years PAT CAGR: 42%
  • Annual sales for FY 20: 306 Cr
  • Profit After tax : 28 Cr
  • Earnings per share: 12.28
  • Debt to equity: 0.85. Has taken 55 cr term loan last FY for the organic capacity expansion.
  • Dividend Yield: 0.3%
  • Healthy Return on Capital Employed for last 5 years: between 23% to 26%
  • Valuations: currently trading at around 60 PE.
  • Free cash flows negative
  • Largest part of working capital is WIP inventory. Company has to maintain certain inventory levels to meet key client requirements. Hence free cash flows are negative currently.
  • Inventory turnover requirement will change with higher capacities coming in. The need to hold large amount of working cap inventory will go down, thereby working cap days will go down. Resulting in improved free cash flows.

  • Promoter shareholding: 64.3%; Has got revised from 70% in last quarter owing to Malabar India Fund entering the scrip with 4.4% stake No pledge.
  • Low Float scrip

Key Points from last 2 con-calls

  • Revenue mix : 50% from bromine compounds business, 30% from speciality intermediates & custom synthesis , 20% from lithium chemicals business. Company plans to maintain the ratio, may not got altered significantly in next 1-2 years.
  • Revenue guidance: The company has given revenue guidance of approx. 350 cr for FY 21 and little less than 450 Cr for the year after (once the new capacities come into picture).
  • Operating Margin guidance: Margin has been 18% to 19% for last 3 years. Management has guided to maintain Operating margins: 18.5 +/- 1% in near term.
  • Lithium chemicals find applications in pharma industry (anti HIV molecules), eco-friendly methane (VAM) for cooling equipment, etc
  • Pharma business in the anti-HIV space likely to be a good driver for growth.
  • Once Dahej capacity comes in by end of the year, it will lead to more revenue from advanced specialty intermediates.
  • In a way, revenue is somewhat constrained more by supply / capacity than by demand.

Q1 results

  • 18% increase in revenue in Q1 ; EPS 2.62 v 2.32 on year or year basis
  • Revenue from organic chemical business is up 36% in Q1 FY 21
  • Revenue from Inorganic chemicals (lithium based) is down 33% in Q1 YoY; since engineering companies took some more time to start operations. They were almost shut in April & May.
  • Post June, have started getting regular POs. So demand has resumed and inorganic business for Q2 this FY should be on par with last year
    Neogen Q1 result.pdf (1.2 MB)

Possible Risks
Raw material price fluctuations
In the recent con-call – there was a point regarding drop in lithium prices. Lithium prices have dropped about 45% in last 6 months (Link: )

The management acknowledged this and mentioned that they would be able to maintain per kg margin in that business segment. However this fluctuation in RM prices is a risk one needs to be wary of.

Negative free cash flow:
Not able to generate free cash flow currently owing to high operating costs (detailed earlier in the note)

Delay in capacity expansion – The Company has guided for capacity expansion in organic chemicals to be completed by end of this FY. But this is a possible risk as any delay in cap expansion would mean inability to meet additional demand and can dampen next year’s revenue target.

Liquidity Risk
Long term borrowing ~ 90 Cr. This includes the 50 Cr term loan availed recently for capacity expansion.
Short term borrowing 102 cr up from 65 Cr last FY.
In case of any delay in planned capacity expansion – might necessitate the need of further borrowings - short term or long term.

Low float - Low float scrip

Disc: Invested; at sub 400 levels.


Q1 concall notes:

Our domestic and export mix stood at 62% and 38%

we are at 50% of bromine derivatives; about 30% of advanced
intermediates(8-10% of this is CRAMS business) and about 20% of lithium derivatives.

most of the advance intermediates we synthesis are PATENT protected

historically, what we wanted to do is generally not depending too much on a single molecule.And for future growth, being in those many molecules where you can quickly capture growth.

We are having capacity constrain and not demand constrain.
FY21 guidance of 350crs and FY22 guidance of 450-500crs stays


Company Summary From Q2FY21 Investor Presentation

Product mix

Leading manufacturer of Bromine (organic) and Lithium-based (inorganic) specialty chemicals, operating since 1991. Growing contribution from Custom Synthesis and Manufacturing.
Bromine Compounds: Organic compounds containing chlorine, fluorine, iodine-based combinations thereof and others including grignard reagents.
Advanced Intermediates: Combining bromination with other chemistries to create forward- integrated value-added products.
Custom Synthesis & Manufacturing: Products developed for specific customers. Process know-how and technical specifications are developed in-house
Inorganic: The portfolio includes specialty, inorganic lithium-based chemical products which find applications across multiple industries
56% domestic, 44% exports. 80% revenues came from organic chemicals vs 20% from inorganic chemicals in H1FY21. Company’s business has some seasonality with H2 being better than H1; driven by strong demand from Europe as orders tend to scale up in October-November and further accelerate from January. Lithium demand tends to be strong in Q4 as demand from HVAC segment. Demand from the agrochemicals segment is linked to the crop cycle and is stronger during H2.

Customer profile

Customers across multiple industries including Pharma, Engineering and Agrochem. Key export geographies include USA, Europe, Japan and Middle East (27 countries).
End user industries for Organic: pharma, agrochemicals, electronics chemicals, flagerance, flavor
End user industries for inorganic: eco friendly VAM for air/cooling, pharma, specialty polymer, construction chemicals
Selected clients: Austin, sun pharma, solvay, Herero, divis, hikal, cbc, Mylan, thermax, Voltas, Kirloskar, Piramal, Aurobindo


Executing Brownfield manufacturing capacity expansion. 33cr capex in H1FY21 compared to 10.1cr. based on discussions with several leading global innovator companies (need to find who these are. Are they same as the selected clients above?), and demand visibility for new product offerings, we are already planning the next round of organic production capacity expansion at Dahej SEZ unit to be implemented in FY22. Future planned capex is as follows:

Attribute/ Phase of capex Phase 1 Phase 2
Planned Capex (in cr) 75 55
Expected Revenue post full capacity utilization 500cr 660 cr
Comissioning time Q4FY21 FY22
Glass lined capacity to be added (in litres) 126000 78000
Non-glass capacity added (in litres) 0 32000
Total installed glass-lined reactor capacity 256000 334000
Total installed non-glass reactor capacity 24000 56000


Promoters are pioneering technocrats with substantial domain expertise; cumulative experience of more than six decades.

R&D/Innovation/Competitive Advantages

Developed strong R&D capabilities with a dedicated in-house team. 205 Products developed by in-house R&D. 10% of workforce in R&D. Manufacturing units certified on Quality & SHE management systems. Specialised Business Model with high entry barriers (Need to quantify the entry barrier). Company is planning to Increase Custom Synthesis & Manufacturing portfolio


5-year Revenue CAGR of 29%. 5-year PAT CAGR of 42%. Revenue of 82cr in Q1FY21 (12% growth) driven by better product mix led by increased demand for new products from existing and new customers. PAT of 7.4cr in Q2FY21. Moderate PAT growth (2.6%) was due to higher depreciation from the new capacity added, increased finance costs related to capex done last year & a onetime impact of Rs. 0.55 crore in Q2 FY21. Net working capital came down by 12% from 153.1cr (Mar-20) to 134.9cr (Sep-20). In H1FY21, Cash Flow from Operations expanded on the back of lower working capital and internally financed capital expenditure. Historic trends for a few key ratios/numbers:


Company is available at TTM p/e of 60 which is steep. One needs to estimate the opportunity size and quantify the competitive advantages at the next level of detail in order to understand whether or not the valuation is steep vis-a-vis the opportunity size. The company has significant debt. Net debt of 157 cr versus net worth of 136 cr. This is a microcap company trading at high valuation with sufficient MF holding (16% of all shares). If the business underperforms, MF selling can lead to large share price movement and vanishing of liquidity.

PS: My understanding right now is only based on Q2-FY21 investor presentation. I continue to read and learn more.


Head of Business Development, previously worked at PI Industries for a long time (~15 years).

Disc: not invested


Some red flags I see :

  1. Co. Not reporting positive CFO since 2018, even though the net profit CAGR is great.
    7 Years Aggregate: CFO: -5.99 Cr, EBITDA: 188.69 Cr, Net Profit: 81.89 Cr
    (Source -

  2. Short term debt and working capital increasing consistently from 30Cr & 23 Cr in 2017 to 102 Cr and 81 Cr in 2020. Presumably because company is not able to convert the net profits into cash ?

  3. Recievables are about 25% of sales and Inventory is about 35% of sales. So, looks like hal f of the company’s revenues are stuck here and not abled to be converted to cash ?

  4. Decrease in promoter shareholding between Mar 2020 to Sep 2020, at levels between 340 to 520 which is certainly at a steep discount to CMP


Bromination - The process of treating a substance with bromine: especially, for the introduction of a bromine atom in place of hydrogen (in an organic compound).

Good insight from Edelweiss , thanks to @Worldlywiseinvestors for sharing.

Two key raw materials are Bromine and Lithium , spot prices can be spotted from the below links.

Keys Risks

Fluctuation in the RM prices of Bromine and Lithium, later is in very high demand due to EV revolution.
Debt levels are high (mainly due to ongoing CAPEX )

An example of the Grignard reaction is a key step in the (non-stereoselective) industrial production of Tamoxifen[19] (currently used for the treatment of estrogen receptor positive breast cancer in women) (Bromine Spot Price)

Lithium - 2022 Data - 2017-2021 Historical - 2023 Forecast - Price - Quote - Chart (Lithium Spot Price )

NeogenChemicals_Coverage.pdf (3.3 MB)


They are really of no use for Neogen because they have a long term contract with suppliers and prices are fixed for a year at beginning of the FY.
From Q2FY21 concall notes:

IMO this is not a key risk due to their annual contracts. Not sure about lithium but that part of business is also much smaller.


Carrying inventory was addressed by the management during one of the calls. It is a trade-off that they are facing between immediate benefit vs de-risking & future growth. They have consciously chosen that they don’t want a single molecule to contribute more than 15% of revenue. Higher turnover from a single molecule involves a concentration risk.
They have chosen to trade-off immediate benefit in favour of a de-risking. And when the additional capacity comes on-board they have the option of growing in those many molecules with multiple customers.
neo 1

Regarding working capital cycle - they have indicated negotiating terms with their key vendors regarding credit term & seem to have got a favourable response.
So its something to keep a watch on if this does get reflected in better cash conversion in upcoming quarters.

Promoter holding – have mentioned in my note above that this stake was picked up by Malabar India Fund.


Notes from Q3 FY 21 call

• Company has received contract manufacturing business for 2 molecules from the global customer. (discussed in Q2 call). These innovator companies they work with- sometimes they get partial technology knowhow on which they build on; whereas at times they have to start from scratch
• With these new contracts, revenue % from custom synthesis & contract manufacturing likely to increase to upto 20% in 2-3 years (from existing 10%)
• Lithium & RM pricing – while there was some volatility, there is a certain minimum price realization which is guaranteed
• Working capital – Owing to Covid, there was a higher stock build up. That is being released gradually. While some measures have been taken, some working capital will stay – as the company grows. More work likely to happen next year once they have additional turnover
• Revenue target for FY 22 is 450 Cr. With additional capacities coming in, next FY, capacity available in FY 23 would be 650 Cr.
• Turned cash flow positive in Sep’20 and it has improved further in Dec 20 (Q2 result)

Disc: Invested


Update on capex

  • Both phase 1, 2 expansion at Dahej would expand organic chemical capacity by 3x with a capex of Rs130 crore.
  • This would translate into incremental revenue of Rs350-375 crore at peak utilisation against overall revenues of Rs306 crore currently.
  • Dahej facility to largely cater to the custom synthesis opportunity with the Vadodara plant catering to advanced intermediates market.
  • Given both these segments have better gross margins compared to the base business, increase in the share of these segments is likely to expand group gross margins and, thereby, OPM and return ratios
  • Company has taken EC approval for around 18000 MT of organic chemicals at Dahej of which only 25% would get commissioned in the next two years

Update on working capital

  • Since Neogen is working on many organic molecules and size of the same is materially lower, it has to keep large WIP inventory to curb manufacturing cycle time.
  • Going forward, with an increase in custom synthesis deliveries and garnering large custom synthesis contracts as witnessed recently, the company can keep dedicated glass lined reactors. Thus, WIP inventories can be restricted significantly.
  • Further, higher bromine consumptions could lead to more bargaining power for Neogen, which can lift payable cycle.

Disclosure: Invested


Company has guided for Rs450crs of revenues in FY22 vs Rs336crs in FY21




thanks you so much sir will you please share edeilwess and wordly wise investors link , thanks in advance.

Did anyone attend the concall or have link to its recording?

Key points from the Q4 call

  • 450 Cr topline guidance for FY 22 remains

    • Plant is just starting and stabilizing - customer approvals are involved. So don’t want to give guidance beyond 450 cr at this stage. Faced some challenges in April and May in getting the plant stabilized, etc.
    • My view – guidance is little on conservative side & mgmt. doesn’t want to over commit
  • Capex update

    • 75 cr capex incurred (for Organic) completed. The 2nd one - 55 cr capex to add to existing capacity is ongoing, in parallel. Reactors will keep coming between Q3 and Q4 of this year.
    • As we progress along - Q2, Q3 & so on- we are likely to see improvement in revenue - being contributed from Dahej site.
  • Gross margin drivers in this qtr – 2 factors

    • Improvement in product mix side. Engaged in longer process value added molecules.
    • RM side – Better RM pricing of Lithium.
  • Advanced intermediates business

    • Target is to increase Advanced intermediate business to 40% in couple of years from 30% currently.
    • Targeting 670 cr revenue in FY 24 with full capacities coming to play. Within which targeting 40% share from adv intermediate business.
    • Discussion with new clients are progressing stage wise. Nothing has materialized yet.
  • Does higher revenue from CFM mean better margins?

    • Higher revenue from CFM may not necessarily mean better margins.
    • Better margins would be a result of doing more of innovation and from multi stage complex molecules. As they do more of innovation work in CFM space - margin profile should improve.
  • Working capital

    • Net Working Capital reduced from Rs. 169 crore in FY20 to Rs. 126.5 crore in FY 21. Working Capital Days improved to 137 days. Will look to maintain the same & improve.
    • Improvement has largely come from inventory side. And to small extent from debtors side.
  • Debt levels

    • Current debt - 216 cr. Since some capex is pending - expectation is it will be around 260 to 275 cr by the end of the year.
    • My view: This is something that was discussed in the past and the mgmt had guided that they have a robust demand visibility - and they have looked at different scenarios & kept different opinions in mind while taking the Capex decision. How the mgmt. rides the balance between growth and leverage is something to keep an eye on. They have guided for a threshold of not crossing D:E more than 1.2 . Debt to Ebitda not more than 3.5
  • New Hires in Sr Mgmt side

    • Hired VP R&D, VP Business Development for CFM business (with a view to increase CFM share of revenue) . R&D spends as a % of sales has increased from 5% to 9%.
    • Hired GM procurement. Buying less from traders and buying directly from customers. Trying to negotiate better terms.
  • Whether FY 21 growth is subdued considering niche space they operate in?

    • Growth in FY 20 was constrained by capacity. Company was at similar stage in FY 17. After the new capacity came up in FY 17. revenue increased from 110 cr to 300 cr in FY 20
    • So now with new capacity on board, confident of achieving 675 cr in FY 24.


Key management call takeaways

Organic Chemicals

 Production at Phase-I greenfield project at Dahej SEZ commenced in May’21, which should take total revenue potential of Neogen’s capacities to INR500cr. Asset turnover for the new facility at Dahej is expected at 2.5-3x.

 While manufacturing of initial commercial batches has commenced, product quality assurance and customer validation processes are in progress post which full commercial production will begin.

 The Dahej plant will enable Neogen to deliver greater value-addition products through multi-stage processes and complex chemistry.  In the first year of operations, management expects EBITDA margin of ~18%. However, margins should inch higher with normalisation of the plant and increased contribution from Advanced

Intermediates segment.

 With new facility being operationalised, management has reiterated revenue guidance of INR450cr for FY22. Contribution from existing two long-term CSM contracts will be INR60-80cr.

 On optimum utilisation at Dahej facility, management expects to achieve overall revenue of INR650-670cr by FY24.

 By FY24, management is aiming to achieve product mix of – 40% for OC, 40% for Advanced Intermediates (including 20% contribution from CSM) and 20% for IC. Expected increase in contribution from Advanced Intermediates and CSM business over the next 2-3 years should lead to margin improvement.

 With increasing revenue, R&D expense should increase to >1% of overall revenue; additional capex would be incurred to fund existing R&D projects.

 In Q4FY21, both OC plants achieved utilisation of ~90%.

 CSM engagements are progressing well through stages and some of these should materialise in H2FY23 or FY24.

Inorganic Chemicals

 For the year, improvement in gross margin was on account of product mix change as well as lower raw material prices.

 Utilisation level at IC plants stood at 60-70%.


 In continuation with initial capex of ~INR75cr for the Dahej facility, second phase of capex to the tune of INR55cr has been currently undertaken. Of this, ~INR25cr has been incurred already and remaining INR35cr will be incurred over FY22.

 While planned reactors will be installed over Q3FY22 and Q4FY22, expansion activity will be completed by FY22. This additional capacity will contribute incremental revenue of ~INR150-175cr.


 Maintenance capex would be in the range of INR20-25cr.

 Logistical constraints have eased marginally from what was observed over Mar-Apr’21.

 Prudent inventory management provided cushion against challenges pertaining to raw material procurement. However, impact of logistical issues was felt on the export front to some extent.

 While working capital may rise in FY22 due to operationalisation of Dahej facility leading to higher inventory along with an increase in debtors (based on expected rise in exports), it should normalize to FY21 levels towards the close of FY22.

 Additionally, on the supply front, management is eyeing on increasing credit days for its key raw materials.

 Going forward, RoE and RoCE should improve slightly in FY22 and by at least 2% post that. Management would like to keep D/E ratio below 1.25x and Debt/EBITDA below 3.5x.

 With environmental clearances in place and land availability at Dahej site, new capex will require comparatively less turnaround time. This will enable the company to grab opportunities in agro and pharma related CSM business over the next 3-5 years.


One thing, I liked about the management is the low-balling in terms of forecasting.
Many analysts tried to get the higher estimate but Management only guided for 650-670crs for FY24.

It is refreshing to observe a change in terms of guidance, otherwise lot of companies are guiding for the moon.

I generally liked that they are pioneer in CDMO for Bromine products. Currently they accounts for 5% of this market. Given long experience of management with Bromine, it has a good runway for growth.
This can be a niche in making.

Disc: invested


1QFY22 11% YoY growth in revenues and 20% gains in PAT.

Production of Organic Chemicals at the newly constructed facility in Dahej has commenced with trial commercial batches. Customer validation, product quality assurance and final statutory permissions are underway.

Once commissioned, this facility will significantly bolster the performance momentum of Neogen, as this site will allow the company to undertake assignments of complex chemistries which require multiple steps.

Company is confident of fully commissioning this plant in Q2 of the current year and all efforts are in this direction. Company’s revenue guidance of Rs450 crore in FY22 (v/s 344crs in FY21) remains unchanged.

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