Neogen Chemicals - Niche player in specialty chemicals

kartik_bhat · August 10, 2021, 6:19pm

Notes from the Q1 call

Production of Organic Chemicals at the newly constructed facility in Dahej has commenced with trial commercial batches.
- In Q2 – phase 1 capacity will be working fully & 75% of phase 2 reactor will come on line by end of Q2 / early Q3. We will start to see progressively higher revenue contribution as we progress in Q3 and Q4
- Plant received approvals from 2 CSM clients. More customer approvals are expected. Of these two, one is a long term Custom synthesis client (revenue from this client should start coming in from Q2) and another one – likely to come in from Q3.
- Some of the customers in bromo side of business have also provided approval for the plant and have given POs. Some have requested for some data to be provided. Once they are satisfied with the data norms provided – some more customers are likely to shift to Dahej
Capacity Utilization
- Roughly 80% utilization in organic at Mahape & Karakhadi
- Inorganic – at 65% utilization
52% increase in inorganic chemicals business YoY. Volume wise - Lithium demand, slightly higher
- Increase owing to lower base last year.
- Q1 FY 21- we had lockdown. Lithium segment impacted - since engineering & AC companies were shut due to lockdown
Increase in employee expenses
- Compared with Q1 - increase is more sharp. There is no one off. Once Dahej starts contributing, employee cost as a % of revenue will improve.
- Expect it to be higher in this FY than last year
  - (This would be attributable to achieving the sales guidance provided for next 2 years and the growth envisaged in Advanced intermediates business)
- Talent acquisition - Sr management point of view - team is in place.
Gross margin - Usually in the range of 40 +/- 2%. On improvement in gross margin – will be able to provide more clarity once product mix stabilizes. This FY expecting it to be 42 +/ - 2%
Advanced intermediates & CSM business
- Usually contributes in 25 to 30% range. By FY 23-24 with full utilization of phase 1 & II capacities expect it to increase to 40%. CSM – would be around 20%
- Currently have around 10 customers. Additional 8 to 10 customers – with whom they are in discussions. Long process to onboard a customer
CSM business
- The 2 contracts won – have a 50 cr revenue potential. While the company has given guidance of 20% of the 650 Cr topline guidance for FY 24 (which is 120 cr) – appears to be on conservative side.
- Mentioned - Dahej plant taking some time to stabilize. As it stabilizes – will make all efforts and happy to over achieve the guidance provided
- Agro chem, pharma and other businesses are all part of CSM pool of business
Likely differentiators in CSM business ?
- 1 of the expectations of majority of customers – one stop solution (doing as much in 1 single place rather than having 10 vendors to cut down on logistics cost).
- Execution capabilities - On time Delivery
- Capability to do advanced innovation
- There are other companies also that do bromination. Differentiator for Neogen is – does a very large variety of bromination, has strength in sourcing of bromine, bromine recovery & recycling. Mentioned the example of Navin –expertise in Fluorination.
Customer acquisition
- Were capacity constrained earlier. Now with new capacities in place, now looking to approach wider range of innovator companies.
- Now well positioned to give more assurance to customers regarding capacities
Whether 450 Cr guidance conservative? – Chose to downplay this. 85 cr run rate per qtr – 350 cr annual. With 450 its a 33% jump. In Q2 – will get more customer approvals, etc. So, 450 is a decent target
Client concentration – top 10 customers contribute around 40 -50% range. Almost all pharma companies in India are Neogen’s clients.
Exports – Some molecules which we were making in Baroda & Mahape – will start manufacturing in Dahej. Expect export contribution to increase as Dahej commercializes. With increase in export – effective tax rate may come down slightly by 2-3 % (based on simulation)
Long term debt stands at 130 cr

Disc: Invested

Prakhar_Pandey · August 22, 2021, 7:36pm

Interview with MD Harin Kanani sir

Key takeaways -

Lithium molecules which they make are currently used for engineering, pharma, speciality polymers etc. They are only watching the Lithium-ion battery development for EV till now(someone if has any knowledge more on this, please share)
Exports are currently 46%(last quarter). With new SEZ facility in Dahej coming up, the exports will contribute >50% in few years.

vnktshb · September 7, 2021, 1:34am

sujay85 · September 8, 2021, 8:52am

Initiating coverage report by HDFC Sec

Sakir_Saiyed · September 15, 2021, 6:57am

B&K Securities : Ideation Series with Mr Harin Kanani & Mr Ketan Vyas - Neogen Chemicals Ltd

Sakir_Saiyed · September 15, 2021, 5:05pm

Notes:

Chaitanya_Ghorpade1 · October 17, 2021, 3:06pm

As per management guidance 650 crore revenue is expected after capacity is online in 2024.
Anyone has idea about what will be effect to Operating profit margin after capex. Will it remain around 20% or increase further ?
Because if OPM doesn’t increase then I am not able to see what will be growth as PE is around 89 now.

Kapur21 · October 17, 2021, 6:52pm

They are moving up the value chain into advanced intermediates at new Dahej facility + securing csm contracts… so margin is expected to increase… management has also guided for same in the last two concalls…

FalduNil · October 31, 2021, 10:21am

NEOGEN CHEM Q2FY22 SUMMARY

KEY DEVELOPEMENTS

Total Organic Chemicals reactor capacity increased from 154,000 litres to 407,000 litres through brownfield expansions across facilities

Phase l expansion completed in Sept 2021

Phase Il expansion completed in Oct 2021

Approved CAPEX of Rs. 35 crore at Vadodara facility for:

250MT of Electrolyte capacity for lithium lon batteries advanced chemistry cells
Pilot facility to speed up process development and commercialization of specialty chemicals
Overall site development

Strong Opportunities in Lithium Battery sector

Government focus on self-reliance in battery manufacturing has opened up new prospects

India has invited global bids for giga-scale Advanced Chemistry Cell (ACC) production units
Bidders to commit a minimum of:
5 GWh manufacturing capacity
Investment of Rs. 250 crore per GWh
60% localization through value-addition in five years to create
strong opportunity for Indian component manufacturing companies
Clearly-defined timelines for battery manufacturers to set-up ACC capacities under PLI scheme
Scheme outlay of Rs. 18,000 crore over five years
Import substitution potential of ~ Rs. 20,000 crore annually
India imported Lithium cells/batteries worth Rs 8,818 crore in 2019-20

Sector manufacturing opportunity: estimated investment of ~Rs. 45,000 crore

LITHIUM ION BATTERY ( 3.7 V)
Approximate Cost Component Break up

Development initiatives under process for:
• Electrolyte Formulations
• Electrolyte Lithium Salts
• Specialized Cathode Materials
• CSM opportunities

Portfolio of battery application products at quality/efficiency optimization stage, prior to commercial scale up

Positive demand evaluation discussions with 9 potential cell manufacturers, including overseas players for electrolyte and 6 international customers/ distributors based out of Europe, Japan and Korea interested in electrolyte salt

Electrolyte production plan at Vadodara unit developed following board approval:
• 250 MT to be operational by H1 FY23
• Commercial scale plant to be set up based on customer commitments and approvals
• Lithium Salt manufacturing capacity at Vadodara to support internal demand for commercial scale electrolyte production

Expansion of Lithium Salt production capacity at Dahej unit to meet international demand subject to customer commitments and approvals

Source:
Neogen Chem Q2FY22 Press Release
Neogen Chemicals Q2FY22 Presentation
Neogen Chemicals Q2FY22 Result

Value_Catch · October 31, 2021, 4:39pm

Please look at the Inventory days…

211 days of Inventory for a debt financed co is something to be seen carefully…

Debtor days also not comfortable…

Cashflows are erratic…

kartik_bhat · November 3, 2021, 4:58pm

Key Notes from the Q2 call

• 38% growth in revenue YoY ; saw volume growth despite several operational headwinds witnessed during the qtr
• Lithium prices had corrected last year, resulting in lower base price. Prices are back to normal in Q2 FY 22

Most of the questions were around the electrolyte capacity for lithium-ion batteries
Pilot facility for electrolyte capacity –
• 35 cr capex requirement. Likely to be funded through a combination of internal accruals & debt.
• This is one of the first such plants in India. Will increase revenue potential to 700 to 725 cr by FY 24.
• Majority of capex will come in in H1 of next year, plant likely to be operational by Q2 of FY 23
• Electrolyte demand by 2030 expected to be around 70,000 MT.
• Huge Import substitution potential of ~ Rs.20,000 crore annually.
• Contribution to revenue from Electrolyte Capacity – Developing theme. Will be able to give better clarity by FY 23.
• Well poised to ramp up capacities next year in case if there is higher demand for Lithium cells. Working with customers to decide further capacity addition

Competitive advantage?
• Lithium salts is a key component of electrolyte – the heart of it. Neogen has 30 years’ experience in making Lithium salts. Worked with top 2-3 companies in the space… Complex process - Have to control CPM level of impurity.
• Have a headstart over other companies in this space. Backward integration in Lithium would be an advantage & would help in meeting customer needs in terms of meeting timelines, etc

Customers for the new capacity:
• If there is a EV vehicle maker – they buy battery from someone. Inside battery – there are specific advanced chemistry cells. Not produced in significant quantity in India. Imported from outside – Taiwan & other South east nations. Electrolyte is a key component of these cells. So the companies making these cells would be the customers of Neogen

• Part of the capacity planned: Mgmt. has clarity on whom they would be selling it to. They are in talks with other companies.
• Currently customers are domestic players, in talks with an international client too

Gross margin profile of new initiative vs. Lithium Bromide (making it for last 15 years)
• Too early to define the gross margins – as it depends on lithium price volatility, extent of backward integration, final stable volume that can be manufactures, etc
• In terms of complexity - its more complex vs Lithium Bromide. Have to control impurities
• Degree of control that is required is much higher in electrolyte… Should have better margin overall.

Both CSM & lithium initiative will continue to remain in focus. Have a team in place for CSM - a VP R&D , so enough expertise for CSM within Neogen.

Guidance
• Whether company can achieve the revenue potential for FY 23 ahead of time - Will wait till end of FY 22 and then be able to give guidance for FY23 .
• Confident of achieving revenue of 450 cr for this year.
• Current long term contract will contribute around 60-80 cr to FY 22 revenue

Disc : Invested

kartik_bhat · December 6, 2021, 4:33pm

Board meeting on 8th Dec to evaluate and approve proposal for fund raising.

https://www.bseindia.com/xml-data/corpfiling/AttachLive/f28759f5-7456-46fa-895d-a374f3c36663.pdf

rajguleria · December 8, 2021, 3:44pm

Board Meeting outcome ( source : Equity Bulls ) : Neogen Chemicals Limited (Neogen), India’s one of the leading manufacturers of Bromine-based and Lithium-based specialty chemicals, has announced that its Board of Directors, at its meeting held today, approved the issuance of up to 16,04,710 equity shares on preferential basis at an issue price of Rs. 1,402.12 per equity share aggregating to approx. Rs. 225 crore.

The proposed issuance will bring on board some of the high-quality, marquee institutional investors, like:

SBI Mutual Fund
Axis Mutual Fund
Plutus Wealth Management LLP
White Oak Capital

Neogen has demonstrated its expertise across multiple chemistries including complex chemicals in the existing line of businesses, namely Organic Chemicals and Inorganic Chemicals. In addition to this, Neogen foresees significant opportunities emerging in advance intermediates, custom synthesis and new application for its expertise in lithium chemistry for manufacturing lithium-ion battery materials, required for manufacturing Advance Chemistry Cells for Lithium Ion Batteries having applications for Energy Storage for Renewables as well as for rapidly expanding Electric Vehicle (EV). The objective of this fund raise is to support the company’s growth and to capture the upcoming high potential opportunities in these segments.

The equity infusion will further strengthen Neogen’s balance sheet position while making it future ready, to tap the growing needs of key end user industries.

REQUEST OPINION : Learned boarders should give their opinion on why this preferential issue is at a discount of 18% to the Close of today.
–Insiders started buying around 2nd / 3rd dec despite deep weak-ness in the overall mkt …and today the news is out …is this a normal practice ?

luckbychance · December 8, 2021, 3:59pm

I think the 18% discount is a non-issue. The folks who are subscribing would have a 1 year lock in so they bear equal (if not more) risk. This is just noise in my view and I would prefer to ignore.

I today read Mayank Singhal of PI Industries remarking that they aren’t interested in battery chemistry because a) lithium resources are not available in India and hence backward integration will remain a risk and b) because they think that lithium chemistry is commoditised.

I know Neogen has remarked previously that the specific chemistry in use for EV is relatively complex since it requires lesser impurities, etc. Anyone has any insights on this?

D - Invested since 1200 levels.

kartik_bhat · December 30, 2021, 6:53am

I think the reason is more due to former than the latter one.
This question was addressed in a way by the management; 2-3 reasons why Neogen has a likely competitive advantage in this space:

One stop solution provider (helps customers to reduce logistics cost). There are some other companies who are lithium salt producers but not into electrolytes or vice versa. But not both. Advantage of backward integration helps them in meeting customer’s timelines better… Which is an entry barrier for a new player to enter the space.
3 decades of expertise in Lithium salts & strong execution capabilities.

Balaji1974 · January 2, 2022, 1:32pm

RIL is going to produce batteries using Sodium which is highly available
in India. Lithium is available only in few countries. When RIL enters who can stand against it?. Experts please comment.

luckbychance · January 2, 2022, 1:48pm

Too early to say anything. Battery tech is highly disruptive. Reliance may tomorrow buy another company that’s going to manufacture using Aluminium (read up on Log9). Then we have solid state batteries that are currently the most promising, which also use Lithium.

There is a risk ofcourse but I feel that Lithium (used in electrolytes) will continue to dominate since the next best alternative to Li-ion is solid state, which in itself is some years away from commercialisation and then mass scale adoption.

Vaibhav_Ramani · January 3, 2022, 4:40am

RIL acquiried a company thats going to manufacture Sodium ion Batteries. This might be game changer as only 2 3 countries are having enough lithium ore under thier land which is limited compare to Sodium which is also cheaper and can get easily near sea cost as india is having surplus amount of sea shore where ample amount of sodium supply is available.

pennywise · January 3, 2022, 5:21am

Lithium will still be used in automobiles and phones in the near future , sodium will first replace grid storage solutions etc where size and weight constraints are not as high

luckbychance · January 16, 2022, 11:23am

How many steps would be in there in such backward integration? Lithium electrolytes are made from salts, which are in turn made from? From my limited knowledge lithium mineral is refined to make Lithium Hydroxide or Carbonate. They in turn would be used to make salts? How does the chemistry work?