Overview of Business
Mr.Narayan Lawande incorporated NGL Fine-Chem Limited in 1981. The Company is a veterinary pharmaceutical raw material manufacturer and its products are mostly used in the animal health industry.
The Company manufactures APIs and intermediates for application in veterinary and human health. It provides a range of products catering formulations for farm animals with Africa as its largest end-user market.
The Company has a strong and growing international presence in Latin America, Asia and Europe, backed by its superior quality and value-added products.
The Company’s strategic and long-term goal is to be a global player in animal health APIs. In line with this goal, NGL continues adding products and customers in different markets. Most of the Company’s products cater to the livestock segment which makes up roughly 65% of the total global market for animal APIs and intermediates.
Product-wise revenue of NGL Fine-Chem Limited
A large portion of the Company’s revenue comes from the veterinary API segment. It manufactures over 20 APIs in this division. NGL also manufactures three APIs for human health used in antidiarrheal, angina and anti-malarial treatment.
Veterinary APIs 78%
Human APIs 8%
Intermediates 6%
Finished Dosages 8%
I have a frame of analysis, learnt from my mentors, which covers the following important analysis points as mentioned below.
Financial Analysis
Key variables in the Business
Operating Efficiency Analysis
Margin of safety i.e. Self sustainability in the Business
Fund flow analysis
Business Analysis
Size of opportunity
Financial Analysis of NGL Fine-Chem Limited
Let us analyze the financial performance of NGL Fine-Chem Limited over the last 10 years. While analyzing the financial reports and available public documents of NGL Fine-Chem Limited, it is very much clear that NGL Fine-Chem Limited has started to report consolidated financial reports from FY2019.
As we are trying to analyze the financial reports of NGL Fine-Chem Limited for the previous 10 years and hence we will analyze here the standalone financial reports from FY2012 to FY2018 and further we will analyze here the consolidated financial reports from FY2019 to FY2021.
Sales Growth
Over the last 10 years, the sales of the company have increased at a growth rate of 24% from ₹36 Cr in FY2012 to ₹258 Cr in FY2021. Further, the company reported higher sales too i.e. ₹307 Cr in its last 4 quarters ending Dec-2021.
While, if we analyze the trend in sales growth of the company, then we will notice here that the company has reported continuously higher sales year on year except a slight decline of 1 Cr in sales in FY2020 which could be due to global pandemic of Covid -19 lockdown. Except that, there was never a decline in sales in the previous 10 years. Hence, we can say that the journey of the company over the last 10 years was very smooth in terms of sales.
Operating profit and Operating profit margin
Over the last 10 years, the operating profit of the company has increased at a growth rate of 39.5% from ₹4 Cr in FY2012 to ₹80 Cr in FY2021. Further, the company reported a slight decline in its operating profit i.e. ₹74 Cr in its last 4 quarters ending Dec-2021.
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However, there were two financial years i.e. FY2018 and FY2020, where operating profit of the company was down as compared to previous financial year respectively. We will try to find out the reason of reduction in its operating profit during these two financial years i.e. FY2018 & FY2020.
Similarly, Operating profit margin of the company followed the same pattern as the operating profit of the company. Operating profit margin of the company was continuously increasing from 11% in FY2012 to 26% in FY2017.
Continuous increase in operating profit margin of the company was basically possible as the company has decided to enter into the market of high margin products.
But there was a reduction in the operating profit margin of the company in FY2018 which was 19%. Again the company has managed to increase its operating profit margin from 19% to 21% in FY2019. But, the company has again faced a drop in its operating profit margin and this time drop was higher comparatively. It was 15% in FY2020.
However, operating profit margin of the company increased to 31% in FY21. We will also figure out here the reason for the drop in operating profit and operating profit margin of the company during the mentioned period and this reason will help me to understand the key variables that are affecting the operating profit and operating profit margin of the company.
Reason for the decline in sales of the company
Management has mentioned in its July-2020 concall that the sales were affected by the Covid-19 pandemic during March 2020 due to severe logistical issues.
“Our impact on sales has been mainly due to the COVID19 pandemic. Raw material imports from China were affected during January to March due to which production for some products were affected. Secondly, exports virtually came to a standstill from 15th March, 2020 onwards due to COVID19 pandemic affecting India and the government announcing various steps to lock down the country.”
Management of the NGL Fine-Chem Limited have addressed the unavailability of key raw materials as the reason for sales drop in their Dec-2019 concall.
“ With regard to lower sales, we have been constrained in procuring some key raw materials and have seen sales drop of almost 4 different products due to low or no availability of raw materials. This problem has continued during the current quarter. We have been able to make some alternate arrangements, but these will have an impact only in Q4 this year.”
We must note here that this is not the first time when availability of raw materials impacted the sales of the company. Management has mentioned in their Dec-19 concall that availability of raw materials also created problems in 2010, 2012, and 2016.
Reason for the decline in Operating profit and Operating profit margin of the company
Operating profit and operating profit margin in FY2020 was dropped mainly on account of increased operating costs while the sales from the new expansion are yet to come in. Let us see the reason given by the management, in their Dec-2019 concall, for the drop in Operating profit and Operating profit margin.
“There has been an increase in operating expenses. Major items have been salaries, repairs, electricity, and fuel which together have increased by over 7%. Our employee strength has gone up with the new plant while revenues have not yet started flowing in. The same holds good for electricity and fuel expenses. The fixed costs have gone up while proportionately the revenues have not started flowing in.”
Management has mentioned in its July-2020 concall that the Operating profit and operating profit margin were affected by the Covid-19 pandemic due to increase in overheads and underutilization of the capacity.
Important key factors or variables
There are following important variables that we should understand to understand the NGL Fine-Chem Limited business.
Company does not have pricing power over its customers - Weakness of profitability due to volatility in raw material prices
NGL Fine-Chem Limited operating profits are affected due to change in raw material prices. They are not able to pass on the incremental cost of raw materials to customers as there is high competition in its business. Therefore, in order to avoid the reduction in its market share, management is focusing on being cost competitive.
Management has also mentioned in their Dec-19 concall that we believe that we should give the best possible pricing to the customer. So, we have to be very cost competitive in whatever we offer given the fact that we are in a B2B business.
CRISIL Rating agency has also pointed out the similar weakness in the business of NGL Fine-Chem Limited.
“Vulnerability of profitability to volatility in raw material prices: NGLs major raw materials are intermediates (N-2 and N-3 level intermediates) and solvents used for manufacturing the APIs. Given the elevated inventory levels, the company's operating profitability remains exposed to the adverse movements in the raw materials prices that cannot be adequately passed onto the customers. In Q2 and Q3 of fiscal 2022, operating margin saw an impact and were lower at 22% and 15% respectively as compared to around 30% recorded for the same quarters in the previous fiscal.”
So, the company does not have pricing power over its customers. Management has mentioned in their concall June 2021 that they are not able to pass on the increase in prices of raw materials to customers.
“ Our pricing is fairly inelastic because when the prices go down, we are able to keep that to ourselves. At the same time, when prices go up, we are not able to pass it on to customers. Unless the price increase is significant, in which case whenever we see something which affects our material costs more than 2%-2.5% that is a time when we start looking at passing it on to the customers.”
High product concentration risk with major presence in animal health API
NGL primarily manufactures various veterinary APIs, which account for 85-90% of the total annual sales, while the rest are derived from intermediates, formulations, and human APIs. Top 3 products still occupy 40% of the total sales in fiscal 2021. However, this proportion has reduced from 47% as seen in the previous fiscal.
This is very important to note that if the top 3 products will contribute to 40% of total sales of the company then in a situation when demand of any one product out of these 3 products drops then company sales will drop significantly. Hence, management needs to focus on their product mix to avoid the high product concentration risk.
However, management has mentioned in their concall June -2021, management is focusing over the increase in market share of other products too.
“Our growth has been very wide based during the last one year. Our top 3 products used to contribute 47% of our sales during FY20. Today it contributes only 40% of sales. So, we see such decreasing trend contribution from the top 5 also and the top 10 also, which means that our other products are growing at a much larger pace than these mature products. We see a pretty good growth coming up as our market share even in these products is going up. So, we see an overall well rounded growth coming up for us.”
Issue in availability of key raw material
Management keeps mentioning that they are procuring key raw materials mainly from China only. There are various instances where the company has faced the problem of availability of key raw materials and hence sales and operating profit margin impacted significantly.
Management of the NGL Fine-Chem Limited have addressed the unavailability of key raw materials as the reason for sales drop in their Dec-2019 concall.
“ With regard to lower sales, we have been constrained in procuring some key raw materials and have seen sales drop of almost 4 different products due to low or no availability of raw materials. This problem has continued during the current quarter. We have been able to make some alternate arrangements, but these will have an impact only in Q4 this year.”
We must note here that this is not the first time when availability of raw materials impacted the sales of the company. Management has mentioned in their Dec-19 concall that availability of raw materials also created problems in 2010, 2012, and 2016.
Management has mentioned too in its concall of Dec-19 that there are some raw materials where they are not able to find any alternate source except China.
Challenges in gaining the market share
Management of the NGL Fine-Chem Limited have addressed, concall Dec 2021, the challenges that they are facing in gaining the market share in their products.
“We have an internal target of doing between 2 and 3 products every year. That is about 10% product line expansion every year. Those products are new for us, not for the market because we are doing only generic products. Generic products means the products are already in the market. They are new for us because we are doing it for the first time. The whole idea about these products for us is that when we come in, it is already a product which is well established in the market and our job is to take away market share from somebody else who is now in the leading position right now.”
But it is good to see that they are continuously focusing on gaining market share.
Raw materials derived from crude oil
NGL Fine-Chem Limited management has mentioned in their June 2021 concall that there are some key raw materials that are derived from crude oils and hence their costing depends on crude oil price.
“We have seen prices go up quite a few products as the oil prices go up, so there are quite a few chemicals that are dependent upon oil, so those have gone up by a good 50%-60% in the last 1 year. There are 3-4 products where prices have gone up because of shortages or some plants getting closed internationally. So, there are some products, probably close to about 15-20 products where we have these price increases going on right now.”
Therefore, we must note here that the operating profit margin of the company will be affected by the change in crude oil pricing.
Drop in crude oil price will help to increase the operating profit margin of the company and similarly increase in crude oil price will compress the operating profit margin of the company.
There will be other key variables too that will influence the business of NGL Fine-Chem Limited and I will add them here when I come across them.
Interest coverage ratio
While I prefer a company that has interest coverage of at least 3. If we see the interest coverage ratio of the company over the last 10 years, most of the times it was above our benchmark i.e. 3. Even it is much more than our benchmark and if we see the interest coverage ratio of the company for FY21, it is 29.9.
So, the company is very much in a comfortable position to pay its debt. The company is able to maintain its interest coverage ratio on a healthy side and even very much comfortably in FY21, because company operating profits have increased from ₹4 Cr in FY12 to ₹80 Cr in FY21 with a CAGR of 39.5%. Therefore, we can think that the company would not find it difficult to service its debt even in tough times.
Debt to equity ratio
While I prefer a company that has a debt to equity ratio less than 1. If we see the debt to equity ratio of the company over the last 10 years, it has improved from 0.6 in FY2012 to 0.1 in FY2021. Debt to equity ratio is improved basically due to increase in the equity of the company.
Operating Efficiency Analysis of NGL Fine Chem Limited
Net fixed asset turnover (NFAT)
Let us analyze the Net fixed asset turnover (NFAT) of the company in the last 10 years. We will notice here that Net fixed asset turnover of the company was continuously either very close to 4 or more than 4.
But, it dropped to 2.80 in FY18 and it was continuously decreasing from 4.63 in FY16 to 2.36 in FY20. It again started to increase from FY21 and now as of FY21 it is again close to 4 i.e. 3.91.
While analyzing the reason for decreasing NFAT during FY16 to FY20, it was noted that the company was increasing its capacity. If we see the capex executed during periods i.e. from FY16 to FY20, it is ₹74 Cr which is 70% of total capex that company has done in the previous 10 years.
Hence, Net fixed asset turnover (NFAT) of the company was lower because the company was executing capex and increasing the capacities but any new facility will definitely take time to generate the revenue.
Once new facilities started to generate the revenue, NFAT started to increase and as of FY21 it is 3.91.
Management is saying with the help of their annual report that they have started to increase their capacity.
Annual Report FY16
“The company is undertaking a capital expansion project at its existing plant in Tarapur. The necessary statutory consents have been received and construction has commenced. The plant is expected to be operational by the first quarter of 2017-18. The total project expenditure is to the tune of Rs. 25 crores”
Annual Report FY17
“The capital expansion project undertaken by the company is proceeding as per schedule. The machinery erection and installation is currently ongoing and is expected to be completed by Q2 2017-18. The plant is expected to be operational by Q3 2017-18. The total project expenditure is to the tune of Rs. 30 crores.”
Annual Report FY18
“The company’s expansion project in Tarapur has been completed and trial runs have been undertaken successfully. Capacity ramp ups are expected in Q2 of the current financial year. We expect to have double digit growth in sales from the new capacity roll out”.
Annual Report FY19
“The company has acquired 100% equity shareholding in Macrotech Polychem Private Limited in May 2019 for an inclusive consideration of `700 Lakhs which includes the value of equity shares and loan given to Macrotech to repay its existing liabilities. Macrotech is engaged in the manufacture of pharmaceutical intermediates. This will help the company to enlarge the range of its products and also to further backward integrate production of pharma intermediates.”
During FY20, Sales dropped and Management has given the reason for drop in company sales as mentioned below. This could be one reason for the lowest NFAT i.e. 2.36 in the previous 10 years as they have increased their capacities but during FY20 their sales got affected.
Let us see what management has mentioned in their concalls
Management has mentioned in its July-2020 concall that the sales were affected by the Covid-19 pandemic during March 2020 due to severe logistical issues.
“Our impact on sales has been mainly due to the COVID19 pandemic. Raw material imports from China were affected during January to March due to which production for some products were affected. Secondly, exports virtually came to a standstill from 15th March, 2020 onwards due to COVID19 pandemic affecting India and the government announcing various steps to lock down the country.”
Management of the NGL Fine-Chem Limited have addressed the unavailability of key raw materials as the reason for sales drop in their Dec-2019 concall.
“ With regard to lower sales, we have been constrained in procuring some key raw materials and have seen sales drop of almost 4 different products due to low or no availability of raw materials. This problem has continued during the current quarter. We have been able to make some alternate arrangements, but these will have an impact only in Q4 this year.”
Inventory turnover ratio
Let us analyze the inventory turnover ratio (ITR) of the company in the last 10 years. We will note here that most of the time the inventory turnover ratio (ITR) of the company was in the range of 8 to 9.
However, there is a reduction in inventory turnover ratio i.e 6.5 in FY20. Management has mentioned in their Dec-19 concall that the inventory was a bit on the higher side because 4 products are into validation. So, all the inventory is slow moving for those.
During concall July-20, management gave the reason for higher inventories as they were executing in that quarter for which they had a little bit of inventory built-up plus FG dispatches did not move to from mid-March onwards. So these two things ended in increasing inventory.
Now what we need to study here further in the coming quarter if there is any sharp reduction in inventory turnover ratio or increase in inventories. If there is a continuous fall in inventory turnover ratio then there might be issues that the company is facing.
Analysis of receivable days
Let us analyze the receivable days of the company in the last 10 years. We will note here that receivable days of the company were continuously reducing from 115 Days in FY17 to 45 days in FY21 and it is a very good sign. Any business which is able to maintain its receivable days around 60 is very good.
Company is now able to collect its receivable effectively.
Cumulative cash flow from operation (CFO) vs Cumulative profit growth (PAT)
We can note here that cash flow from operation for the last 10 years is ₹106 Cr and cumulative profit after tax for the last 10 years is ₹141 Cr. So, we can note here that the company is somewhere not able to convert its entire profits into cash flow from operation.
Margin of safety in the business of NGL Fine Chem Limited
Self sustainable growth rate
The self sustainable growth rate of the company was continuously positive and it is always higher than its sales growth rate if we neglect FY15 and FY20. It indicates that the company will be able to meet its growth plan with its internal resources, Hence, the company will not have to be dependent on the outsource funds like debt and equity dilution.
Dividend payout
During the period FY12 to FY21, The company has paid dividend ₹3 cr and retained the earning by ₹138 cr.
Free cash flow
During the period of FY2012 to FY2021, the company has generated cash flow from operation ₹106 Cr. During the same period, the company has executed CAPEX of ₹102 Cr. So, if we determine here the free cash flow for the same period, it will be in positive ₹4 Cr.
Fund flow Analysis
I have tried to summarize the flow of funds with the help of the following table. Fund coming to the company is indicated here in positive sign and fund going out from the company is indicated here in negative sign.
I have also given here the color codes for ease in understanding. Fund coming to the company is indicated here in green color and fund going out from the company is indicated here in red color.
Assumption : Let us focus here the major fund flow
So, let us see here from where the company is securing or generating the fund in FY2021
Company has secured ₹ 3.7 Cr by selling its assets.
Company’s Equity has been increased by ₹ 55.5 Cr
Company’s Trade payable has been increased by ₹ 8.7 Cr i.e. company is using more ₹ 8.7 Cr money of its suppliers during FY21
We can see here that sources of funds are very good. These funds are basically generated by shareholder equity and trade payables. However, the company has sold some assets of ₹ 3.7 Cr but we can see, in application of these funds, that company is using funds in creating assets too. So, sources of funds are very good.
Now, let us see here how the company is utilizing this fund in FY2021
Company has utilized ₹ 12.4 Cr fund in creating the assets like property, plant, equipment as CWIP will be converted further into fixed assets.
Company has purchased some investments of ₹ 18.4 Cr.
Company has repaid its debt too. Debt repayment amount was ₹ 12 Cr.
Inventory piled up and ₹ 10 Cr of funds stuck here.
Fund stuck in trade receivable is of ₹ 11.4 Cr.
Therefore, the company is approximately utilizing or expending a fund of ₹ 64 Cr. I have left the small fund outflow here for ease in understanding the major fund outflow. Considering the nature of utilization of funds, we can easily say that the company is utilizing the funds in the correct way as funds utilized in debt repayment, investment and procurement of assets are considered as very good utilization of funds.
However, considering the inventory accumulation and increase in receivables indicate that the company has to work on its operating performance to improve its operating efficiency.
Comparison of NGL fine chem Limited with its peer
NGL fine chem Limited is showing outperformance with its peer in terms of sales and profit growth. Following table is self explanatory.
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Business Analysis
As we are aware that a large portion of the Company’s revenue comes from the veterinary API segment. It manufactures over 20 APIs in this division. Therefore it is very much needed to understand here the size of opportunity for the company.
The animal healthcare market
The animal healthcare market comprises production animals (livestock, animals for meat) and companion animals (household pets). The contribution of the two segments in the overall market in 2020 was approximately 65% and 35%, respectively.
The global animal healthcare industry was valued at US$50.89 billion in 2020. It is expected to record a healthy CAGR of 8.8% from 2021 to 2028– emerging as one of the fastest-growing industries worldwide. Region-wise, Asia Pacific is anticipated to be the fastest growing market over the same period. This extraordinary forward momentum is expected to be driven by a couple of factors. Firstly, the growing protein food demand followed by a surge in the occurrence of zoonotic and food-borne diseases worldwide, along with increasing pet ownership globally are the prime contributors here.
Within the animal healthcare industry, the market size of the global veterinary Active Pharmaceutical Ingredients (APIs) was valued at US$6.3 billion in 2020.
Under this segment further, there are two bifurcation i.e. production and companion animals. Production animals are the ones fed for their meat, i.e., livestock. This segment comprises roughly two-thirds of the global animal health market by animal type. Then there are companion animals who are kept as pets (typically dogs, cats, hamsters, birds, guinea pigs and fish). The segment of companion animals constitutes approximately 33% of the global animal health market.
The market for animal health is projected to record a CAGR of 6.9% from 2021 to 2028. This estimated growth is attributed to increasing pet care expenditures and rising number of veterinary visits, alongside growing livestock population. These and many other factors, such as increase in R&D investments, high pet adoption rates, mandatory vaccinations, increased consumption of meat, and advent of feed additives with anti-microbial properties, are likely to act as the sector’s growth enablers.
The Indian pharmaceutical industry
The Indian pharmaceutical industry has grown from US$4.2 billion in 2000 to US$41.7 billion in 2020. The industry registered a CAGR of 11% in the domestic market and 16% in exports from 2000 to 2020.
Indian pharma exports stood at US$20.14 billion in FY 2020-21 (up to January 2021). The country is among the world’s leading suppliers of pharmaceuticals, supplying 40% of the generics to the US and 25% of prescription drugs to the UK, while also catering over 60% of the global vaccine demand.
India is expected to become the ‘world’s pharma hub’ over the next decade strongly backed by its availability of labor, suitable manufacturing conditions, low-wage costs and abundance of raw materials. The industry is projected to register a 12% CAGR from 2020 to reach US$130 billion in 2030.
Size of opportunity
Increasing Government Spending
India’s gross research and development (R&D) expenditure, as a percentage of GDP, has remained stagnant at 0.7% since the year 2000. This figure is far lower as compared to countries such as Israel (4.6%), South Korea (4.5%), Japan (3.2%), Germany (3%), China (2.1%), Brazil (1.3%) and Russia (slightly over 1%). The Economic Advisory Council to the Prime Minister (EAC-PM) expects this figure to reach 2% by 2022, thus giving a thrust to the sector.
Increasing Focus on Animal Health
A lot of developments and awareness towards animal health and welfare is amplifying the focus towards the sector. Higher focus on animal health driving the increasing expenditure on pets, rising companion animal adoption, more veterinary visits, growing livestock population, increase in R&D investments, compulsory pet vaccinations, increased meat consumption, and advent of feed additives with anti-microbial properties, are amplifying the focus on animal health. This is giving a major boost to the animal API and intermediates market.
Threats or Risks
However there are some threats too and these threats need to be studied here for better understanding of the scope of future business of the company.
Rising Costs of New Products
Lately, new medicines are becoming expensive to produce. It is estimated that the cost of producing a new medicine is rising by approximately 10% each year. Hence, pharmaceutical companies are compelled to hike prices, which might lower the demand in terms of volume.
Regulatory Dependence
India is inherently dependent on the United States Food and Drug Administration (USFDA)’s regulatory approval for the launch of a new product. Thus, making it vulnerable to rejection or delay in product’s approval.
Furthermore, on an average, regulatory approval in India takes approximately 20% to 40% more time as compared to the US, European Union countries, or Israel. This affects the launch of new products and their formalities further.
Manufacturing Capacity
NGLs manufacturing facilities are located at Maharashtra’s Navi Mumbai andTarapur. The facilities have received the Good Manufacturing Practice (GMP) certification from the Maharashtra State Food and Drug Administration.
Company management says, our current capacity utilization levels are in the range of 85-90% which further necessitates the headroom for further expansion. While we are continuously debottlenecking and making efforts towards process improvement to help attain higher capacities, we are also considering our next leg of greenfield capacity expansion at our Tarapur unit.
I hope you have enjoyed the complete fundamental analysis of NGL Fine Chem Limited. This post is only and only for educational purpose.
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Thanks to my Mentors Ishmohit Sir, Anand Gurjeev Sir and Dr Vijay Malik Sir
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