I don’t believe any raw material prices have increased drastically (as crude is the most basic underlying for their raw materials which has been pretty stable since last quarter)
Only thing spoiling margins are employee expenses and Other expenses. These other expenses have also come after the acquisition. I still don’t understand what was the need of acquisition. And till what time will we see benefits of acquisition
Management in their first conference call on 15th December, clearly said that 3rd quarter will be subdued, as they were still running validation batches from the new plant. They have also said that 4th quarter will be better and they expect a 10% bump in top line for the year.
However, full benefit of the expansion will start accruing only from FY21.
Regards,
Raj
Disc: Invested, no trading in last one year
Any idea whether these other expenses are part of those validation batches ?
The poor results were expected as management in their last concall has clearly mentioned that next few quarters will be tough due to higher operating expenses. In a small company , such increase in expenses have a big impact on bottomline. It will take some more time before substantial revenues started generating from few facilities.
Disc: No Positions , will look to add in a staggered manner in dips
The company has highlighted that shortage of certain raw materials was a major reason for change to less profitable product mix and less sales in previous quarter.
I was trying to gather the raw materials source etc. and if ongoing coronavirus situation will have an impact again. Put together some info. below around the same.
FY19 financials indicate that only 10.5 Cr. was the raw material imports cost for the year out of total raw materials purchased of ~64 Cr… So the company majorly bought raw materials domestically which could in turn have been procured by someone who imports - not easy to figure out unless we know the exact raw materials.
In FY18 financials, the company has mentioned below:
“At the same time, an equal opportunity is available in the under-developed
markets. The rate of growth in these markets is remarkable with the
make locally campaigns running in different countries. While countries
encourage the make local idea, the make local is restricted to the finished
dosages markets. The technology to manufacture the APIs is still
restricted to India and China thereby making this an unique opportunity
for API producers. With the low cost manufacturing advantage that
India offers, Indian firms are remarkably suited to take advantage of this
situation for the next decade”
Also, copying from an earlier post by @ankitgupta from the FY18 AGM:
“For many of our products, we are backward integrated upto N – 8 stage. Higher the number of reactions, more the complexity and hence higher the profitability. We also have strength in some of the reactions. In addition, we have taken various initiatives including reducing water, wastage and even liquid discharge to improve our profitability. Over the long term we should be able to maintain 20 +/- 4% PBILDT margins. The profitability margins depend on commodity prices especially crude. However, we are able to largely pass on the increase in raw material prices to our customers. Over the past one year, prices of lot of raw materials and intermediates have increased by 50 – 100% and these have been fully passed onto our customers.”
Product pipeline & R&D : The company had plans to introduce 4 new products including two for poultry from the new plant but the same has been postponed to next year post commencement of operations of new plant. Poultry API is a bigger market than mammal API markets we serve. Top 3 products constitute 50% of our sales. In these molecules we have 60 – 80% market share in the unregulated market. These molecules are pretty old and growing at a steady rate of 8 – 10%. We plan to introduce 3 – 4 new products every year. Our R&D team consists of 30 employees including 3 PhDs and 11 MSc. One of the PhD scientist has experience of drug discovery while the other one has done PhD from abroad. We pay them pretty well. 50% of time of the R&D team goes for optimising the reactions for current molecules being manufactured by the company while the remaining goes on working for new molecules.
Accordingly we can understand some of the expenses being forward looking and can’t be cut so easily.
Overall, the story seems positive going forward.
Disc: Invested
Firstly, thanks to all the seniors and members who have made this thread so insightful.
I’ve been following NGL for a few months and trying to understand the business.
Have been reading ValuePickr forums and decided to start with Business Model Canvas first (before jumping to Business Quality Insights and the recent Mental Models Framework) , following is my analysis (the underlined questions in the attachment are the things which I need help in, to understand the business better and are reproduced below for everyone’s convenience) NGL_Business Model Canvas_Ansh-Gupta.pdf (72.9 KB)
Request you all to throw some light on this 
Given that NGL operates in unregulated and price sensitive markets, how do the customers react when the company increase prices? (the company mentioned in AGM’19 that about 10-15% growth came from price increase)
The objective for asking this is to understand how sustainable is this practice going forward
When selling products to customers, how is the pricing decided exactly?
Is the price fixed for everyone/does it depend on quantity/varies by the size of customer/else
How does the company approach/discover new customers?
There were a few other questions too which might not be relevant (I wasn’t sure, therefore separating them from the above ones):
a) For either imports/exports, they must be using a partner, right? Is there a need to dig into this in terms of how it can affect the business
b) Since 80-85% raw materials are available domestically, is there a need to look into the concentration of suppliers? In terms of how a supply chain disruption may be caused if the company is dependent on 1-2 suppliers only?
c) Since the capex requirement is huge, is there any alternative for this? Do similar companies rent factories instead?
Besides analyzing the business, I tried to gain some insights on Sustainability, Longevity, Scalability and Peer Comparison, would love to hear everyone’s views on the same:
1. Sustainability
For every Rs 100 sale, ~ Rs 43 is used in fixed capital investment and ~ Rs 31 is used in working capital, so the only way for the company to meaningfully grow is keep increasing sales at 15-20% every year
The above point also suggests that NGL Finechem is not a business which can cause ‘disproportionate growth’ but can still grow at 15-20%
NGL’s numbers for FC and WC are pretty similar to that of Sequent, so I’m assuming it cannot be improved upon
(The numbers for working capital and fixed capital have been taken from ‘Price Implied Expectation’ from the mental models thread excel)
The question about sustainability is that can the figures of 15%+ sales growth, 20-25% ROE, 20% ROIC be continued? Why/Why not?
I’m of the opinion that since sales growth is not too magnificent (nothing like 30-40% YoY) and the company has shown that it’s niche strategy is working, it can be sustained which will further drive the other metrics positively
2. Longevity
One major question here is, how long is the runway for the company? 3 years? 5 years? 10 years?
This is directly related to the quality and sources of growth, which are the following according to me:
High Quality Growth:
a) Commercializing new products in its existing markets
The company develops ~2 products every year and that should help drive sales
Approximately, the market size of current products is ~1000cr and the company seems to have captured ~15% of that
Roughly, size of each molecule is around 40-50cr, so every year the market size keeps expanding somewhere between 80-100cr (8-10%)
b) Gaining market share in older products
c) Untested poultry segment in which company has recently decided to enter
Lower quality of growth (can only help to an extent) can come from d) Price Increase and e) Cost reduction
3. Scalability
Seems like the only way to scale is
a) to keep adding new production facilities (a bit capex heavy, as management has said they’ll require 100cr capex for the next 5 years out of which about 60% is new capex)
b) to develop new molecules
The unregulated markets are growing at a faster pace compared to regulated markets (6-7% +) and that should help the company increase its scale
4. Peer Comparison
Here, I wasn’t sure on how exactly to go about it (request someone to guide me), so I did the following:
In terms of financials, NGL seems to be clearly outperforming its peers- Sequent and LASA in most aspects like superior ROE, OPM, Net Profit Margin etc (Numbers taken from Screener)
For Sequent, their focus seems to be more on the regulated markets, having setup a USFDA plant in Vizag (as per their annual report) and their major revenue driver is Formulations (70%) while Animal API is about 30% so I’m not sure how comparable it is
LASA seems to have taken a bad beating, and doesn’t seem to be much of a threat now
Hi @Ansh_Gupta I believe its value parameters is not variety of APIs. They are very concentrated and revenues from top 4-5API are much higher. They like to make it in bulk for their clients with reduced cost and that’s the reason client stick to them else than going anywhere else
Your first point about price increase
I think I partially addressed in above , it seems (from interviews and secondary information) that they have great client relations and they don’t increase price frequently. This can be in a fix period of say once in 3 years or if any raw material pressures. So they don’t have a reason where price will affect their market share. Infact they like to dominate the market for products they make .
I think this question doesn’t have a exact answer but raw material like crude and it’s derivatives play important part for price…so crude rise becomes little negative for this company and put pressures on margin
I think AGM would be best place to get answer for new customers but I can say they have a very good impression among old customers and they won’t leave them unless any issues of closing down or bankruptcy. We can assume old customers can also help getting new ones
I would like to know where exactly you got these details… Would be helpful
Frankly speaking if you read the annual report of around last 7-8 years you will find company being very conservative in doing capex. So if they are doing it , they see that business coming in. Company has a history of not working with less capacity utilisation so far. And it’s not a commodity business where factories exist to make APIs they want and just be rented . I hope that clarifies
I think it’s not yet comparable to sequent as sequent is in regulated space and they have a global presence with lot of companies acquired all over the world. We can only compare un-regulated business of sequent if available.
Any chance you gotta look at Hester Bio? I think that would help.
Lasa has poor promoter history and so again comparison will give a biased view towards NGL
Hi @paresh.sarjani1
Thank you for clarifying the first 3 points, that was really helpful.
I did look into Hester, but didn’t think of it as a relevant peer due to Hester’s focus being vaccines and poultry segment.
Regarding the % of RM imports, I calculated it as (raw material imports cost/total raw material cost), assuming it doesn’t buy RM from someone who imports it, though now I think this might not be a good approach
No problems…
Just FYI , My views are based on the promoter interviews , Annual Reports etc.
I was tracking this company very closely since last 1.5-2 years but the increase in promoter take home salary didn’t go down my throat very well. So I exited it.
Disclosure: No holdings at present
NGL Finechem numbers are out and again disappointment continues… Europe markets have dragged the revenues down and eventually company declared consolidated loss (which I have not seen since long for NGL in many quarters)
Good to see geographical break up of revenues
Ayush Bhai… are you still following this ?
Any good reason you see for the bad numbers since last so many quarters that too after decent Capex. Declaration of loss would have been the last thing I would have expected here.
Are numbers bad solely due to early crisis in Europe?
Hi @paresh.sarjani1 - I still own and continue to track. I’m also surprised with the results over recent qtrs. They are bad for sure especially given that the company was expecting very good numbers in Q4 and there seems to be tailwind for the sector. The worry part is more on the operating margins which have taken a sharp hit vs 18-20%+ the company had been doing for a fairly long time.
On the other hand few things to note and give benefit of doubt - 1. The gross margins are still attractive 2. margin hit might have happened due to higher cost due to expansion while there has been no additional revenue 3. There seems to have been mark to market loss of 2 Cr on investments as per cashflow. Yet overall results look poor.
Regards,
Ayush
Disc: Invested in family accounts and clients
company filing impact of lockdown
Macrotech Polychem Private Limited being acquired by the company I couldn’t find details for the company except in ANNUAL REPORT 2018-19 . They had paid 700 lakh . Could some one has any information what is this new company manufacturing ? What is the past of the company ?How this will help NGL finechem ?
regards
Macrotech acquisition was primarily to pass on some of the intermediate manufacturing that NGL does itself now on to Macrotech. Macrotech will be using its plants to manufacture exclusively only for NGL. And that allows NGL to increase the productivity of its own existing plants and the management was hopeful of deriving about 15 crores of value benefit through this exercise over the next few years.
NGL Fine AR 2020 Notes
Near term outlook looks bleak for the company as per the management commentary. Growth from the newly commissioned Tarapur plant will come after the validation of batches is completed in Q2FY21. Ability to scale up operations depends on the manner and speed at which the government scales down restrictions on movement of people and the rate at which the pandemic is controlled. With no immediate capex plan and better cashflows, Co.’s balance sheet is in good state.
Regards
Harshit Goel
A few items from the recent AR and grateful if someone could clarify if these are unfounded concerns:
Current investments (other than cash & bank balances) primarily comprise of equity mutual fund investments. During the last financial year additional allocations seem to have been made to a variety of small and mid cap funds. The book value of these investments is about INR 11.8 cr and the market value is about INR 10.65 cr - though this would have moved up as on date. Why would a company of this size - INR 250cr or thereabout in mcap - deploy cash in such instruments particularly when its doing capex and is in growth stage?
Miscellaneous expenses seem to have more than doubled from about INR 1.5cr to INR 3cr. Any idea what would this primarily be? Could R&D be included within this and lab expenses?
Thanks
