Adding some important missed points
Remuneration is increasing for management
Paid in FY19 -
Rahul Nachane - 85L (Fixed) + 71L (2.5% of net profit or commission)
Rajesh Lawande - 84L (Fixed) + 71L (2.5% of net profits)
Proposed remuneration is 2 crore each for both along with 2.5% commission.
So more than 150% hike in gross pay and commission retains.
So overall managerial remuneration is going to be in excess of 11% of net profits for which share holder approval is required
@harshitgoel @yogansh @dd1474 @ayushmit @paresh.sarjani1
While AR is good read in most part, I observed having empty CASH FLOW FROM FINANCING ACTIVITIES is little odd. Check AR page no 88. Also Cash Flow from Investing statement has some of the financing items. Any thoughts?
Disclosure: Not invested. Not an investment advisor and Investors are advised to do their own due diligence.
Adding to it 1.62 crores in form of related party transactions, but I guess all of this will be discounted in the P/E assigned to the stock.
Invested.
Hi.
It seems to be a reporting error. Cash Flow Statement is prepared in accordance with Ind AS 7 and there has been no amendment in it to show interest payment and changes in borrowings in Cash Flow from Investing Activity segment. These should have been shown in Cash Flow from Financing Activity.
Regards
Harshit Goel
Did anyone try to view results…looks like BSE results attachment misses the actual results and it only has text of first page
I know! this is clearly an error. I’d dropped an email to the CS yesterday night, hope she read it
Thanks @yogansh & @harshitgoel for sharing the detailed notes. Having been invested in this company for last few years, its a pleasant surprise to see such a good and detailed annual report. After so many years the management has given a dividend too.
2-3 points which standout in my mind for this co are:
@paresh.sarjani1 - yes, management remuneration has been on the higher side and related party transactions have been a concern. Yet, i feel this is better than a company not delivering and paying management in unknown ways. Whats more important perhaps is that the management continues to deliver.
Regards,
Ayush
Yes @ayushmit you are right management continues to deliver.
I was just worried about this because
Thank god. Higher management has only two people otherwise…it would cost more to company.
i am checking the annual report i found ! crore is missing from cash surplus Could some one help me to locate that
there are discrepancies in the annual reports
e.g such as in PPE account
2015-16
the closing of year 2016 in various heads is not matching to the year they migrated from GAAD to indAS standard i.e 2017-18
In addition to the high related party transactions & management remuneration as stated in the above posts, would the respected seniors/members consider the below as a risk or be ok with it considering its a small amount in the larger scheme of affairs?
FY19 AR:
FY18 AR:
There are instances of these lapses in FY17, FY16 & FY15 ARs also. Would be glad to hear from the seniors & members.
Regards,
Shivan
Not able to spend prescribed CSR amount consistently is not good from Corporate Governance perspective besides statutory penalties which can be imposed.
Thanks @harshitgoel @yogansh for notes. I am highlighting few additional points along with few questions and few concerns. Would be great if friends can help on some of queries.
Key points:
Management remuneration is almost on the limit border line. 19% salary growth for management and 12% salary growth for employees
Among animal API, anti parasitic is front runner, most lucrative segment and trend would continue for several years
Receivables have increased and payable are down. So, should balance out in future quarters and FY 20 should have better cash flows in my opinion
25% growth in other expenses
HDFC and Axis term loans at 8.5-10.25% rate highlighting strength of business to lenders
Questions:
Company mentions that the ongoing patent expiry is going to boost overall API industry (with several multi bagger drug patent expire). Does any one has historic numbers and future opportunity?
Why Rs 6.59 Cr is kept with government authorities (page 101)?
Why company invests current investments in equity funds (page 102)?
In other current assets, smaller ticket items like prepaid expenses etc is specifically highlighted but the highest ticket item (>80%) is marked as others. Any clues?
There is a 3 cr loss due to fire. Is not it possible to get full insurance protection? Is it a common phenomenon in insurance?
Management salary is already on border line. Apart from that management has taken Rs 1.5 Cr commission on profit. Does not rule sks to add all sorts of compensation in salary? If we include this, is not it way to high and why it is not included in ceiling limit calculation?
In Related party transaction, there is a company called Nupur remedies which is acting as an intermediary on dealing with lab related monetary transactions, insurance based monetary transactions, legal based monetary transactions. So, this looks like just an intermediate entity to deal with outer world. Why company is not dealing directly and why this intermediary?
What does office deposits given to 2 promoters in RPT means?
Disc: 1% position and still studying. Please do your own due diligence.
AGM - 2019 Highlights
This is an acquisition purely for helping in the backward intergration to make certain intermediates. It will help in improving the GP margin. The amount of 7crs is for both the Equity & Liabilities
a. Over the few years the company’s manufacturing processes have improved
b. Macro-Economic situations like – Higher Prices (Possibly due to China Problem) & a weak rupee have helped
c. In FY19 – Volume growth was 10-15% & Value growth was 10-15%
d. Normal Industry margins are between 18%-23%. FY19 was a super profit year and Management does not know till when such a situation will persist
e. Confident of doing +2% on what the Industry’s margin are in the future
a. Company has introduced 4 new products in the last 2 yrs. But the sales from these new products are 0.5% of total sales. The aim of the company is to improve the share of these new products going forward
b. Company is entering into the Poultry segment. Management said that the competitive landscape is similar to the current product basket & the margins are in similar ranges to current company margins
c. Also, on the type of products the company clarified that they are commodity type products
d. New Product approvals can take anywhere between 3 months to 5 years based on the product/ customer & country
R&D facility
Company currently has 30 employees including 3 PhDs. The R&D spends in the future will be increased
30crs Capex @ Tarapur
a. This facility is up & running after the fire incident. Plus, it will achieve an optimal level of utilization in next 9-12 months.
b. Incremental Sales possibility from this Capex is 2.5x the Investment. Ie. 70-75crs
Company is aware of the same and clarified that as there was historically no penalty on not spending the full CSR it was delayed. Going forward there will be 100% compliance of the same
The management clarified that it has a strict policy of extending 60-90 days credit period. Also, in the last 10 yrs the company has not lost more than 60 lacs in the form of Bad Debts.
The company has filed a claim recently. No money has come yet. Total Claim filed is for 7crs which the total loss.
The increase from FY19 to FY18 was on account of a new office space being leased. The lease rentals are paid and based on the going market rates. The company believes in an asset light approach instead of locking capital in the real estate
These are the lab charges that the company pays to Nupur Remedies for using its Lab Facilities
Top customer – 9% of Total Sales
Top 3 Products – 45% of Total Sales
Top Product – 18% of Total Sales. 10 Yrs back it was 90%
a. Company is planning to set up a new plant. Some Civil construction is done. But it seems that current focus is on ramping the New Plant post fire incident.
b. Normally it tales 24/30 months for the full capex to get completed for commissioning. From this it takes 12 months to do the Civil Structure.
I might have missed some points so please add/rectify to the above.
Disc: Tracking Position.
I had attended AGM of NGL Fine-Chem. Some of the points noted during the AGM:
• The brownfield expansion took 2 years to complete and things again got delayed due to fire. However, we are hopeful for optimum utilsation of the new plant over the next 3 -4 quarters.
• Macrotech used to manufacture pharma intermediates and will manufacture veterinary API intermediates for us now. Currently, we are refurbishing it and the plant will be started in October, 2019. Macrotech will help us in backward integration. Will further help us in protecting/improving our profitability margins.
• We haven’t launched any new products in the past 2 years due to capacity constraints. We have done pilot of 4 products in FY19 whose launch will happen in FY20. These products will be launched through the new plant. These includes two new products in the poultry segment which we are entering for the first time.
• We already have EC approval for the Tarapur green field project but we will start working on it only in FY21 in October – November. We have done some civil construction on the plant of Rs.4 – 5 crore. We had applied for land at Ambernath but didn’t get it from MIDC. However, we have enough land available for us for future expansions. The total cost for the capex will be Rs.50 crore.
• We don’t have a 5 – 10 year plan. We work on 2 – 3 years rolling plans.
• Human API is just 2 – 3% of our total sales. We are not focused on it as it requires different approach than veterinary APIs.
• Veterinary APIs is a highly technical industry. Vendor approval process is long with one product taking 3 – 5 year approval time. First we share one sample with client. If it passes their quality process, more samples are sent. Post that if the client is ok, stability studies are done on the sample.
• We have had bad debts of just Rs.60 lakh over the past 10 years. We believe that recovery of payment from client is more important than sales.
• Antibiotics usage in animals in EU has to go down by 80% by 2020 as per the law. There will be no impact on our sales as we don’t manufacture them.
• High remuneration paid to promoters? Wont be hitting the ceiling of 20% of profits. Have just taken the approval in AGM. Last year also we paid around 7 – 8% of profits as remuneration to promoters. We will not cross the same this year also. Going forward also it will not cross 10% of profits.
• Till 2017, we had not seen any increase in prices of our products. In FY19, volume growth was around 15 – 18% while prices of the products increased by 10 – 12%. Volume grew during FY19 as we ran the plant for 7 days instead of 6 days till FY18. Our capacity utilization has increased to 110 – 115%. With new plant becoming operational, from April, 2019 we have stopped overtime in old plant.
• Fixed costs of new plants (employee cost and other overheads) have been absorbed in P&L in FY19 only.
• For unregulated market’s customer, approval time is usually low at around 3 – 6 months. For MNCs, it can even take 5 years for approval. Even with an existing MNC customer, approval for new molecules takes a lot of time. 50% of our revenues comes from European MNCs. These companies inturn supply products to unregulated markets.
• Criteria for selecting/working on a new product to be manufactured:
o Customers approach us to manufacture the molecule
o Chemistry skills – New products in existing chemistry where we have expertise
o Our own research leads to working on new molecules
Normally, when we start working on development of a new molecule, only 1 – 2 out of 10 molecules progress to commercial stage.
• New project for Tarapur green field capacity will take 24 – 30 months for completion from the date of commencement of that plant. It takes 12 months for civil construction and another 12 – 18 months for installation of equipment.
• Operating margins – we are confident of maintaining EBITDA margins in 18 – 23% range going forward. We can deliver 2% higher margins than industry. Most of the molecules we manufacture are N – 8/N – 9 stage. The minimum reactions in any product we manufacture is N - 6.
• R&D team – We have grown from 4 – 5 people to 30 people currently. We have 3 PhDs working with us. Last year, R&D spent was 2.5% of sales (not every expenses is reflected as R&D spent) and this year we plan to further increase it to 3.5% of sales. The R&D team works on adding new products, improve processes and reduction in wastage of old projects. We believe that quality of R&D spending is more important that quantity (no of molecules developed). We are spending judiciously on R&D.
• On the issue of rent paid to Nupur Remedies – Our R&D center is based out of the premises. We could have taken lease from some unrelated party and our rent would have been much more. We don’t want to spend Rs.10 – 12 crore on purchasing a new office.
• Poultry market size is bigger than other veterinary markets as chicken is the largest meat consumed in the world. The size of each molecule that we plan to manufacture in poultry space is 250 – 300 crore. In poultry also we are looking at high realization product like our remaining products.
• Not looking to enter EU or US markets in the medium term. US markets is biggest market for veterinary APIs. We will have to build a separate plant for regulated markets. Costs are much higher and gestation period are also high.
• Customer concentration – largest customer contributed 9% of sales.
• Product concentration – Top molecule contributes 18 – 20% of sales while top 3 products contributed 45% of sales
• Fire damage claim was filed last month. We have opted for reinstatement of our expenses from insurance company and that’s the reason we filed claim after refurbishing the area impacted by fire.
• In Macrotech, we can expand capacities in future. Have Maharashtra Pollution Control Board (MPCB) and EC approval for the same. Out of 7 crore acquisition cost of the company, Rs.3.50 crore were paid to earlier promoters of the company while remaining Rs.3.50 crore was paid to repay liabilities and unsecured loan.
• We have given our maiden dividend this year and hopefully, dividend payout will go up from FY19 levels.
• 50% of are sales are for EU customers who themselves supply them in non – regulated markets.
• We are not looking to enter regulated markets currently in the near to medium term.
• Out of 22 molecules that we manufacture currently, we are not manufacturing 3 – 4 of them due to unavailability of raw material from China. The situation has now eased and we will start manufacturing them soon.
• Most of our sales is on spot basis and prices are revised on monthly basis.
• We will have 20% plus market share in our top 7 – 8 molecules globally. The market share will increase further if we only talk about unregulated markets.
• We continue to target 15 – 20% growth rates in revenue over the next 2 – 3 years.
• We have 8 – 10 molecules under development in R&D and will launch 3 – 4 molecules every year.
• % of sales from new molecules launched over the past 5 years has increased quite a bit but our top 3 molecules are more than 5 year old. It takes time for a molecule to contribute significantly to our sales.
• We had taken 10 – 12 day shutdown in old plants during Apirl – May, 2019 (Q1FY20).
• Chinese chemical companies will make a comeback sooner than later but their cost of production will increase compared to earlier levels.
Thanks that was much detailed.
Sharing my notes from AGM:
In feb 2019 we started the new plant. In next 3-4 quarters we should be able to reach optimum utilisation.
Macro tech - we have acquired this co for backward integration - production of intermediates. The company had EC (which is very valuable these days) and 38 cubic metre capacity. We are refurbishing the plant as per our standards to start utilising the same. This investment should help us increase our margins.
Trial batches of 4 products going on. Plan to commercialise in coming quarters.
Zero liquid discharge at Tarapur. Will do one more plant in current year and then 1 more plant next year.
China should come back in a year. We are not manufacturing about 4 products of our 21–22 product basket as production stopped in China. As China comes back, we can manufacture them.
Last year we did about 35% growth - about 15% would be due to price increase rest volume. Till 2017 prices were going down then they started rising since 2017 and it took us sometime to increase the prices as customer resistance is always there.
We have weekly off on Friday at our plant. It is necessary as we are a pharma grade company and we take lot of caution on cleanliness etc. Consistency and quality won’t be possible otherwise. Last year due to demand we started working on Fridays too and paid overtime to workers. Since the new plant came online, we have started taking weekly off on old plant.
Our capacity was 150 cubic meter and with new plant it will be 250 cubic meter. Peak production can be 225-250 Cr.
Cost of operations at new plant is being charged to P&L.
It will take sometime to increase production at new plant as we have been working on new products since last couple of years and as of now validation/trial batches are going on. The new products are for Poultry industry. This is much bigger industry but the overall realisations are very low. We generally operate in APIs of about 4-5000 Rs per kilo while this market has molecules of 500 per kilo. We have been able to find some molecules which are high value and fit into our value range. But it will take some time. 40% would be old customers rest we will have to develop.
As EC is getting very difficult, this time we have already taken EC for our new Tarapur plant in pipeline. We have done the minimum required civil work. Will start working on that once we utilize 50% of new plant. Look to invest 40-50 Cr in this new Tarapur plant.
Overall 10-15% growth is normal and achievable. We don’t want to give any guidance as a policy.
Customer acquisition time is 3 months to 5 years. 3 months for a customer from a country like Bangladesh and 5 years for a customer from a country like Europe.
R&D team has grown from 4-5 people to 30 people in 10 years. 2.5% of sales as expense on R&D. May increase to 3%. It has helped to improve process, new product development.
We sell to European customers, who sell end product to un-regulated market.
We intent to remain focused on in-regulated market for next few years.
R&D - new product happens on 1. Customer request 2. Similar chemistry 3. Own research.
New plant takes 24-30 months to get commissioned.
Industry margins at EBIDTA levels are about 18-23%. Last year was a very good year and generally don’t sustain. We can do couple of % points more than industry.
We don’t have a 10 year plan, we don’t have a 5 year plan either. We work on 2-3 year view.
Human API - not significant. We had done some products but couldn’t get success as mindset is different.
This is a highly technical industry. Long vendor approval process. It starts with sharing samples. Then ask for more samples. Then stability study. If approved then we start selling. It takes 3-5 years to scale up a product.
We are very conservative company - its easy to spend money but difficult to manage and generate returns.
Bad debts are hardly 60 lac since start.
Receiving money more imp than selling.
We did 4 new products in last 2 years but couldn’t scale up. Macro tech acquisition should help us in improving the intermediate problem.
Top 3 products would contribute about 45% of turnover. Largest product would be about 18% of turnover.
Market potential - why aren’t there large cos in vet industry from India - the market is not as big as it is thought to be - large part is human side. And some part is very low value or too competitive. We are in a niche where few molecules are of high value and we go to 7 to 10 steps (reactions) to product them. So such kind of area is not very large. In some of the molecules we have good market share. There is good competition too - usually 5-6 players are there for each molecule.
On questions of increase in salary - its an enabling resolution. The salary will be capped at about 7-8% of PBT. We don’t intend to overshoot.
On questions of substantial increase in rent to related party - the R&D is carried out on premises owned by group company. It’s a 5000 sq ft property at jogeshwari. We also took a office 2500 sq ft at Ville Parle for corporate need. If you calculate the market value, the rent is very reasonable and at less than market rate. If the co had to invest in these properties lot of investment would be required.
Any guidance by the seniors and those tracking from long on how to ascertain margin erosion, potential increase in demand for products?
As far as I understand, this news should not have impact on NGL as 80% of the top-line comes from exports.
