Shree Ganesh Remedies Limited (SGRL) - A pioneer in API intermediaries and Speciality chemicals?

Stock Opportunities Not-so-Hidden Gems
1

About company:

  • Started as a small pharma company in 1992 and later Chandu Kothia, chairman & MD founded Shree Ganesh Remedies in 2004. Company has two decades of experience in the pharmaceutical sector, and is one of the leading manufacturers of Pharmaceutical Intermediates and Fine & Speciality Chemicals in India.

  • Its products find application in multiple industries including pharmaceutical, polymers, agrochemicals, electronics, aroma industry and many others.

  • It’s a family run business as father and both sons are fully involved in the business operations.

Manufacturing facilities:

  • Company has two manufacturing plants in Ankaleshwar, GIDC Gujarat and both of them are located close proximity to each other.

  • They have a total of 10 production blocks (2 of them are upcoming).

  • Unit-1 production area : 3,76,000 sft

  • Unit-2 production area : 36,500 sft

  • In addition to these plants, they also recently acquired the adjoining company with land area of ~2,15,000 sft which is now merged and this will be used for future expansion.

Business segments:

  • Company is mainly into three different verticals:
    • Human health API intermediaries
    • Veterinary API intermediaries
    • Specialty and fine chemicals

  • They have a 40+ product portfolio, 32 in API intermediaries and 11 in specialty chemicals. 4 of their products have more than 50% market share.

  • Clients spread in more than 15 countries. They want to focus on niche chemistries and provide the best possible solutions to their customers.

  • Company also started a subsidiary in the USA to strengthen marketing there.

  • They also entered into contract manufacturing with some of the Europe clients and one of the projects is already producing revenues from last quarter. Currently they have 3 ongoing projects.

Research & Technology:

  • Company believes in Research & Technology is the way to sustainable growth and has recently opened a dedicated facility for R&T. Focus of the R & T team is to develop not only new products but also focus on improving existing processes. In future they want to get into more sub segments of specialty chemicals to attract more clients.

  • More than 50 people are working in research & process development.

  • A new pilot plant has been set up and commenced operations to reduce the overall process and development time. The best practices from here will be shared to commercial sites for faster production, better lead times, and better utilization of the capacity.

  • As you can see there is a 3 fold increase in fume hoods from 2022 to 2023.

  • They are spending around 3-4% of revenue in R & D from the last few years.

Revenues:

  • Revenue:
    • H1FY24 : 60 crores vs H1FY23 39 crores
  • EBITDA
    • H1FY24: 17.5 crores(29%) vs H1FY23: 11 crores(28%)
  • Net profit:
    • H1FY24: 11.3 crores vs H1FY23 6.8 crores.

  • Company has been able to increase revenues consistently over the years.

Revenue distribution:

  • API intermediaries vs specialty chemicals: 59.3% vs 40.7% (FY23)
  • Exports vs Domestic: 68.5% vs 31.5% (FY23)

Capex:

  • Company has spent more than 40 crores in FY23 for acquiring the land adjacent to unit-1, setting up a new R & T block & pilot plant etc. This is by far the highest capex spent in the history of the company. Company expects to spend 15 crores for FY24.

Clients:

  • Some of their marquee client list includes:

Management:

  • Mr. Chandu Kothia who is the chairman & MD of the company has more than 30 years of industry experience. He started Ashoka pharma in early 90s and later in 2004 started Shree Ganesh Remedies to cater to international clients and to expand business further. HIs educational background is in chemistry and he started involving both of his sons into business. Both of them also pursued masters in chemicals.

  • Gunjan Kothia thinks that the company has just started talked about the future prospects in the FY23 annual report (taken as is):

  1. We are setting up a new GMP manufacturing block designed to cater to advanced API Intermediates, reinforcing our commitment to delivering high quality pharmaceutical solutions to our valued customers. This world-class facility is built in with the flexibility to manufacture in-house APIs which is further under strategic evaluation. We expect this facility to commence operations in the second half of FY24.

  2. We have invested in an advanced manufacturing block dedicated to high-pressure reactions enhancing our pressure handling capacity up to 600 psi. This facility will allow us to widen our product range to better cater to our customers, amplifying our business horizon appreciably. With the commissioning of this facility, we will be one of the few players in our business space, with this capability placing us in a niche position in our business space.

  3. We are setting up a cutting-edge Pilot Block, which will facilitate scaling up complex processes and optimization for the manufacturing processes. In addition, it will also serve as a commercial manufacturing block for small volume high-value products. When commissioned, the unit will provide the much-needed capacity and flexibility in our infrastructure to cater to high-value products. The unit should be operational in Q2 FY-24.

  4. We have set up a new R&D block that houses the latest equipment and cutting-edge technology, allowing us to conduct advanced research and deliver complex, high-quality products. This investment is testimony of our commitment to fostering innovation and supporting the Pharma and Specialty Chemicals manufacturers in the US and the EU to reduce their dependence on China.

Shareholding:

  • Promoters currently holding about 69.33% and total number of shareholders are also at about 7730 (relatively new listed company, came to main board in 2020).

Coverage:

What I have not covered in this:

  • I haven’t gone through their chemistry processes and technologies, the company website has listed them. I am into computer science engineering and don’t have much understanding of organic chemistry.

  • I haven’t talked much on risks, I definitely feel there is a risk in raw materials procurement. It will be great if someone highlights the risks of the company.

  • I haven’t done a deep dive into financials, I would like to do it as and when I understand more about business.

  • I haven’t talked much on the management outlook and opportunities for the company, FY23 annual report covers this and I can update in the coming days about the same.

  • Scuttlebutt from EPFO website to get a feeling of salaries and increments, number of employee etc. I will be doing that in coming days.

References:

Disclosure:

  • After being a passive observer for several years I started being active in the forum again and started writing recently on this forum. This is my first post on the stock idea and would like to build upon the initial post by discussing with other folks and ready to learn from other people in the forum.

  • Started buying after Q2 results and will continue to buy in the upcoming days as business evolves and I get more confidence in the business.

34 Likes
3

Happy new year 2024, everyone.

Scuttlebutt from EPFO website to get a feeling of salaries and increments, number of employee etc. I will be doing that in coming days.

I did some analysis of the number of employee data reported to EPFO. Company has been recruiting people continuously and currently have 121 employee as of Nov 23.

image
image1060×450 62.8 KB

They are consistently adding more than 20% workforce every year except for last couple of years where the growth is >15%. Though we still have 4 months left in 2023/24. There is a sudden dip in Dec-18 causing a substantial reduction in number of employee and they are back to Mar-18 numbers in Mar-20.

image
image750×450 54 KB

Interestingly revenue per employee peaked in Mar-20 (~1cr) and again started rising after Covid dip, they are still behind the Mar-20 peak. Profit per employee is consistently around 16 lakhs. New business orders in coming quarters should help increase these numbers (operating leverage kicking in), as long as company is hiring workforce this should be a good sign that company is in expansion phase and trying to become a pioneer in the field they are operating in.

image
image750×450 42.1 KB

13 Likes
4

SGRL posted a mixed set of Q3 FY24 results.

Q3 FY24 Q3 FY23 YOY Q2 FY24 QOQ 9M FY24 9M FY23 YOY
Revenue 27.97 21.99 27.19% 33.42 -16.31% 88.11 60.89 44.70%
EBITDA 9.32 6.79 37.26% 10.03 -7.08% 26.86 17.77 51.15%
EBITDA % 33.32% 30.88% 7.91% 30.01% 11.03% 30.48% 29.18% 4.46%
PAT 4.8 4.35 10.34% 6.55 -26.72% 16.12 11.15 44.57%
PAT % 17.16% 19.78% -13.25% 19.60% -12.44% 18.30% 18.31% -0.09%

Financial Highlights

  • Company posted a robust 27% yoy increase in revenue, with 37.26% increase in EBITDA and 244bps in EBIDTA margins as well (at 33.32%).
  • Tax rate was 35% (against ~24% qoq/yoy) causing a dent in the PAT (down 13% yoy).
  • On a qoq basis company posted de-growth of 16% in revenues and 27% in PAT.
  • While Specialty chemicals posted robust growth, there is a significant de-growth in API intermediaries revenue and export revenues. The increase in margins attributed to the one of CAMS projects being commercialized.
    image
    image918×689 148 KB

Business updates

image
image878×199 24.7 KB

References:

5 Likes
5

I have also been following the company for sometime. SGRL looks like a very differentiated pharma company operating in the intermediates space where there are lots of growth opportunities. I feel they are following the path taken by Ami Organics, and market really likes these kind of business models (high margins, working capital investment, high ROICs, leadership in core products). I am sharing my notes from their last couple of AGMs.

AGM22 notes

  • Europe gas supply problems: 10-20% of business has been converted from Euro to USD
  • Currency: Got 2mn in Euro in FY22. About 60% of business was in USD and planning to increase it to 65-70% in FY23
  • GMP plant: validation will be finished by March and benefit will flow in nos in FY24 (played out)
  • Growth: Expect 20-25% growth on sales (growth was 26%)
  • Current capacity utilization is 74-75%. Focusing on improving product mix to improve value rather than just focus on volumes (played out)
  • Specialty chemicals:40% of revenues, pharma intermediates: 60% of revenues
  • Jaiswal Pharmachem: Getting legal approvals for transfer of plots, will then refurbish plant and machinery
  • Capability to handle multiple step synthesis, face less competition in few products because it’s a long process to get approval from API manufacturers and they are mentioned in the API cos’ DMF filings, which is hard to change afterwards
  • Customers (US/European) have been for last 10-15 years because of product quality
  • For some products have got very high market shares because they develop 8-10 step synthesis process and work from basic raw materials which are developed from scratch and procured indigenously
  • Thionyl chloride: Transpek is not a competitor. Contributes 40-50% of revenues
  • API and advanced intermediate manufacturing in GMP plant will manufacture higher realization products and increase margins
  • Want to get into exclusive contract manufacturing with EU/American customers for providing stability of revenues

AGM23 notes

- In our annual report, we talk very bullishly about setting up a much larger platform in the future. Can you talk about management ambitions about growth and what do we mean by unlocking something much bigger in the future?
- In our current business, what is the end market of the intermediates that we are supplying to our customers? Are the final APIs or formulations getting sold to regulated markets of US/Europe/Japan or are they largely going to unregulated markets? Can you give a split between the two?

Are not into API manufacturing, already on DMFs of many API manufacturers (domestic + European)
KSM supplier name has to be mentioned in DMF

- With commissioning of our GMP plant, how long will it take for us to get into DMFs/CEPs of API suppliers so that we can sell intermediates for regulated markets? How easy is it for our customer to add a new supplier in regulated markets?
- With our own GMP plant, do we also plan to enter into API manufacturing?
No plans of entering API. Will only enter APIs where they already produce KSM and intermediates and are thus cost competitive

- In the recent presentation, we talked about 3 CRAMS projects. What is the potential of these and what kind of scalability can we see in these projects?

CRAMS projects

  • 2 projects from existing customers, 1 project from a new customer
  • In 1 project, process is patented by clients, final product approval is ongoing in market (new patented molecules), expect small volume in FY24 and peak in FY25/26. 2 suppliers: SGRL and 1 Chinese competitor
  • Even 2nd supplier gets 30% volumes in case of European/American customer
  • In 1 project, SGRL were already manufacturing RM for this product which gave them advantage to get this project
  • Getting contracts from multiple customers for low volume specialty molecules ($400-1000/kg)
  • Personal care project: Brought by one European agent; have added a new technology. No other supplier from India or China
  • Third project (agro space): Customer was manufacturing in their European facility at small scale (process patented by customer). Customer had reached out to all potential manufacturers, and SGRL was quick to grab this opportunity. 1 other supplier in China
  • Expect bare minimum peak revenues of 30-50 cr. (assuming 50% of expected demand)
  • For 2 CRAM projects, will be using high pressure block and won’t require additional capex
  • 1 project will use flow technology

- What is our current reactor capacity and what utilization are we operating at?
Reactor capacity does not determine revenue generation as product mix. 230kl capacity, plan to add 80-100 kl capacity every year. FY23: 80-82% utilization. Batch manufacturing process
Expect 2-2.5x fixed asset turns from incremental expansion

- With us commissioning high pressure reactions block, what kind of traction are we seeing? How differentiated is this technology and who are the other companies doing this in India?
- What products are we making in carbon-carbon coupling chemistry under CDMO model? What’s the end usage of these products?
Goes into specialty and pharma space, customers are in USA and Europe. Products are expensive and chemistry is niche

- With recent genericization of gliptins, have we got into DMF/CEPs of API suppliers for these molecules?
- How much sales comes from our top 3 and top 5 customers?
Top 3: 60%, Top 5: 70%

- How much sales comes from our top 3 and top 5 products? What are those products and what is their end usage?
Top 5: 40-45% of revenues

- At our last AGM, we had mentioned something about thionyl fluoride. Do we have fluorination capabilities and can you talk more about it?
Do not manufacture thionyl fluoride, only thionyl chloride. Chlorination and bromination are their specialty

- How much progress have we made in building our new plant in Jaiswal Pharmachem? What is the proposed timeline for expansion and how much capacity do we plan to install here?
Business breakup

  • Exports: 68%, domestic: 32%
  • FY23: 30% volume growth (Rs. 1200-1300/kg average realizations)
  • Pharma: 60%, 40% specialty and fine chemicals (20-25% of the 40% is to agchem and other is in niche polymer and electronic chemical space)
  • Fine and specialty products should contribute towards future growth, specially from CRAMS business
  • Will maintain same growth in FY24 as seen in last couple of years

Capex:

  • FY23: 42 cr. (30 cr. for Jaiswal acquisition + enhance R&D + production capabilities)
  • Expect 15 cr. capex for capacity expansion in FY24. Building up a warehouse in Jaiswal unit
  • Incurring heavy capex in new technologies to optimize production levels rather than just to enhance capacity (increased annual capacity from 700-800 tons to 1200-1300 tons from same line)
  • Will first utilize Jaiswal unit by 50-60% before moving to Dahej
  • Since last 3-4 years, they have been investing to develop their core chemistry. Very few cos practice this range of chemistry at SGRL’s scale
  • New R&D unit has been commissioned in Jaiswal

3 different land parcels

  • Unit 1 (Ankleshwar): 10,000 sq.m; has increased to 35,000 sq.m with acquisition of Jaiswal Pharmachem; High pressure block is a standalone building; Pilot plant is another standalone building. Has total 7 blocks
  • Unit 2 (Ankleshwar; 1.5km away from Unit): 3,000 sq.m. 2 buildings which are considered as 1 block
  • Dahej: 40,000 sq.m; EC and NOC granted; Got opportunity to acquire adjoining land Jaiswal Pharmachem land and prefe
  • 8 blocks: added GMP block to advance portfolio in more advanced pharma intermediate space (in Unit 1); Current product mix is KSM or basic intermediate
  • Pilot plants are used for products with volumes <1000 kg/year

Miscellaneous

  • Divis: largely into pharma intermediates and APIs vs SGRL is largely into intermediates. SGRL is more diversified into fine and specialty chemical vs Divis largely focusing on pharma
  • Took advantage and acquired RMs at cheaper price due to recent Chinese dumping
  • Key competitors will be cos manufacturing pharma intermediates (one comparable co is Ami Organics)
  • Low Chinese dependence, good backward integration (atleast 4-5 steps), comfortable with the technology and chemistry
  • Leading global producer of 2 products
  • Were able to maintain margins – higher scales due to volume growth drove efficiency, better RM procurement

Disclosure: Invested (position size here, participated through rights subscription in last-30 days)

22 Likes
6

Hi Harsh, Thank you for your notes. Can you pls guide - where can I find the transcript of the AGMs.

7

I recently found that SGRL’s Director, Mr. Gunjan Chandulal Kothia, holds a directorship in a company called Bioshield Ag. I’m interested in understanding if SGRL has any stake in Bioshield Ag, or if Mr. Gunjan’s association is solely on a personal level. I’m wondering if anyone in this forum has any info on this matter. I’ve reached out to SGRL’s investor relations but have yet to receive a response. For reference, please see the following links: Reference: 1) https://www.bioshieldag.com/ 2) Bioshield Ag Ltd - Company Profile - Endole