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)