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Pharma Industry Basics
Global Pharma Market is around 1 trillion dollars.
| Prescription Drugs | Over the counter Drugs |
| Doctor’s prescription is required | Do not require prescription, such as aspirin |
| Requires medical diagnosis | Relies on self-diagnosis |
| Stronger than OTC drugs | Milder drugs with wide margin of safety |
| Used to treat diseases like diabetes | Used to treat minor diseases like cold and cough |
| Expensive | Less expensive |
Branded or Patented Drugs– These are made by innovator companies. They take a time period of around 10-12 years to make them, that includes R&D + clinical trials+ Regulatory Approvals+ Patent time delay.
After passing through these many stages the company gets an exclusivity of 20 years to sell that product. (that’s including the time to get it to market , so the exclusive period for sale will be around 8 years). In this time period the company prices the drug at a premium, thus earning reasonable IRRs and covering up their huge expenses spent on the drug.
Generics Drugs – Once the patent on the branded drug is expiring/ expired generic drug companies come forward and apply for making a copy of the drug. They reverse engineer the drug and make a drug which is a bio equivalent of the original drug. They typically take a time period of 4 years to get the drug to the market. (2 years to make + 2 years for approvals).
These drugs are sold at a significant discount to the original branded drug.
Let us take the example of the drug Abilify (medical name Aripiprazole). It is a medicine used to treat schizophrenia and bipolar disorder. Aripiprazole was discovered by scientists at Otsuka in 1988. It took them 14 years to develop the medicine and finally got the approval to sell it in 2002. Otsuka, being the innovator got a patent to be the only seller of the medicine under the brand name Abilify, until 2015. Hence it was able to earn billions of dollars during this period, making up for the time and money invested earlier. This is how business of an innovator pharma company works
Once the patent was about to expire generic companies started applying for approvals to make the copies of the drug. Alembic Pharma from India, was one of the companies who reverse engineered the drug and showed they had the capability to make a bioequivalent of the drug. Thus, their ANDA filling for making the drug was approved and they received the right to sell the generic version of the drug.
Even with a price reduction of 50- 60% on the drug, generic companies are able to generate good return on capital and healthy profit margins because the money and time spent in just reverse engineering is very less than actually innovating a pharmaceutical drug.
How generics differ from patented drugs??
- Generics differ in shape, size, color, taste, packaging, preservatives, etc.
- Cost less than branded drugs, discounted by 80-85%.
- Generics can be manufactured by multiple companies.
These are the various types of Generic Drugs. Unbranded generics will typically cost less than a branded one.
It is more important for us to understand the generic business as majority of Indian Pharma companies are primarily generic drug manufacturers. They focus on developing their own brands for the generic drugs. This is done through sending their medical representatives on the ground to doctors, physicians, etc. and providing them incentives to promote the brands. This helps to price the product at a premium with respect to the unbranded generics.
New Therapeutic Entity
If we look at the income statements of the Indian companies, we typically see R& D expenses at 8-10 % of sales. This includes not only the cost to reverse engineer drugs but also the cost spending on developing a New Therapeutic Entity (NTE). A NTE is basically an innovation around existing molecule. It can be in the form of changing the way the drug is delivered into the system, combining the drug with some other molecule to improve efficiency, etc. For eg. A medicine which is normally injected in oral form can be replaced with an injectable for better performance.
The innovation for NTEs can be in the following forms
What are APIs or Active Pharmaceutical Ingredients, excipients and formulations?
APIs are the part of the drug that produces its effects. It is the part of the drug that is biologically active.
Excipients are the substances of the tablet, or the liquid the API is suspended in, or other material that is pharmaceutically inert.
APIs + Excipients = Formulation
What are complex generics?
Complex generics are generics of drugs which are hard to reverse engineer and replicate. They maybe complex due to the various reasons listed below.
Complex generics is a hugely untapped market space. The market for injectables, inhalants , ophthalmics offers great opportunity .
A biosimilar (also known as follow-on biologic or subsequent entry biologic) is a biologic medical product which is almost an identical copy of an original product that is manufactured by a different company. Biosimilar have no synthetic chemicals involved in their production. They use living organisms like bacteria instead. Due to this biosimilars are much more scalable as it easy to multiply bacteria.
However, the process of making biosimilars is much more difficult as compared to generics. It requires additional evidence beyond the requirements for generic drug approval, including additional analytical characterization, as well as non‐clinical and clinical data. Because of the complexities, developing and manufacturing high‐quality biosimilars will require manufacturers to have deep scientific and manufacturing expertise. A
Lots of companies are currently spending millions of dollars in this field of biosimilars.
ANDA fillings for generic drug
An abbreviated new drug application (ANDA) contains data which is submitted to US FDA for the review and potential approval of a generic drug product. Once approved, an applicant may manufacture and market the generic drug product to provide a safe, effective, lower cost alternative to the brand-name drug it references.
These are the type ANDA fillings
Para I- Required patent information related to such patent has not been filed.
Para II – The patent has expired.
Para III- The patent will expire on a particular date
Para IV -The patent is invalid, or will not be infringed by the generic drug.
Review of ‘The Little Book That Beats The Market’
It is a wonderful, short and precise book written by Joel Greenblatt. Wall Street Journal describes it as “the best, clearest guides to value investing out there “. The author explains a ‘magic formula’ for picking up stocks in your portfolio, which he has followed for the past 20 years.
About the author
Joel Greenblatt is the founder of Gotham Capital that has achieved a phenomenal 40% annualized returns for the last 20 years. He holds a BS and MBA from Wharton School. He is a professor of adjunct faculty of Columbia Business School, former chairman of the board of a Fortune 500 company.
About the Book
The book initially touches upon the concept of why investing in stocks is a wise thing to do with your money. It’s a way of indirectly making someone else create wealth for you, it’s a way of becoming entitled to a portion of someone else’s business future earnings. The other alternate methods of putting your money to ‘good’ use like keep it under a mattress or giving it out as loans unfortunately does not work well for compounding it.
But simply making a decision to invest in the stock market will not make you rich, the world isn’t so sweet! The real challenge is picking up your portfolio of 15-30 stocks from a list of thousands of publicly listed stocks available. Before we come to the part of stock selection let us understand the significance of intrinsic value of a business. Intrinsic value is the fair value of a business, which represents the true value of the business. It is hard to determine accurately because a lot depends on how the person estimating it perceives the quality of assets, or the future earning potential of the business. Although it is hard to determine the intrinsic value, a rough estimate of the intrinsic value is crucial for investing. Benjamin Graham, one of the greatest stock market thinker and writer of all time, talks about a concept of Mr. Market (an analogy for the stock market). Imagine you are partners in a business with a man known as Mr. Market. Mr. Market is subject to mood swings and offers to buy or sell his share of the business at different prices every day. The ideal step for you will be to sell when he is quoting above the intrinsic value and buy when he is quoting below the intrinsic value. But the question arises how do you know the intrinsic value and recognize whether the business is trading above that value or below it. The next part of the book deals with that problem and also the ‘magic formula’ that has worked so well for the author.
The magic formula covers two important concepts of investing.
1- The price/earning (PE ratio).
This signifies the price a business is available at, with respect to the earnings of the business. It is a measure of how cheap or expensive the market values a particular business. It is simply =
The price of a share / Earning per share
- Return on invested capital.
It is the NOPAT / (Net working capital + net fixed assets)
NOPAT is net operating profit after tax. It is used to remove the effect of some windfall gain or exceptional loss life forex gain/loss, or some other income not related to the business operation of the company.
Net working capital + net fixed assets determine the amount of capital put into running the business.
This formula is the test of how bad or good quality the business actually is, how effectively the company is making use of the money put into the business.
Now the ideal combination will be to find companies which generate great return on invested capital but available at discounts to their intrinsic value. This is what the magic formula is all about.
- Rank all the public listed companies sin your universe in according to their PE ratios (from lowest to highest) & Rank all the companies according to their return on invested capital (from highest to lowest).
2.Add the rank number assigned to each company in both the lists and form a 3rd list.
- The top 30 companies in this list can be selected to form your portfolio
This simple formula has been used by the author from 1988 to 2004, a period of 17 years, to get a marvelous rate of return of 30.8%. Let that sink in!
Now let us address the concerns we may have while using the formula.
- if the magic formula has been giving superior returns compared to the market, why doesn’t everybody follow it, increase the prices of stocks identified using the formula and make the excess return over the market disappear?
The magic formula fared poorly relative to the market averages 5 out of every 12 months tested. For full year periods, the magic formula failed to beat the market averages once every four years. For one out of every six periods tested, the magic formula did poorly for more than 2 years in a row. During those wonderful 17 years for the magic formula, there were some periods the formula did worse than the overall market for 3 years in a row!
These periods of underperformance is good news for patient value investors wanting to apply the formula! It keeps most investors away from the formula thereby safeguarding the superior performance of the formula over the long term.
- The magic formula has worked for the author by selecting from a universe of 3500 stocks. What if we want to limit it to a smaller universe of only larger companies?
Let us raise the bar a little bit, if instead of top 3500 we make it top 2500 companies the formula still delivers a return of 23.7 percent CAGR versus the annual market return of 12.4 %, during the same period tested. If we want to restrict it further to the top 1000 stocks, it still gives an annual return of 18.9 percent over the same period beating the market comfortably.
- What if I am a person who understands how to analyze companies, read and interpret the financial statements, what can the magic formula possibly offer me?
The magic formula can be used as an effective checklist for filtering out the stocks needed to be studied. In this case a person can dig deeper into the stocks suggested by the magic formula and build a more concentrated portfolio than the ones suggested by the formula alone. Such a portfolio will have greater chances of achieving a better return than simply using the formula.
Mirza International Limtied
CMP = 83 ; Market Cap = 1004 cr.; P/E= 12.5 ; BV = 39.6
ROCE = 24.44 ; ROE = 20.66 %
Business – Involved in the manufacturing of leather footwear , apparels , and leather. The company owns the famous brand Redtape( upscale mass market) and Oak Street(niche market). The company has a fully integrated business model from the processing of raw hides to manufacturing leather to manufacturing different parts of a footwear to producing a shoe. The footwear production capacity is around 6.4 million pairs of shoes. (currently running at 80 percent utilization).
Last 10 years PAT = 337 cr.
Last 10 years CFO = 572 cr.
This shows that the company is able to successfully convert its profit earned into cash flows from operations.
Sales growth last 10 years = 12 %.
PAT growth last 10 years = 15. 74 %
PAT growth greater than sales growth is a positive.
OPM margins have improved over the years from around 9.4 % in 2007 to 18.5 % in 2016. On further digging we see that one of the main reasons of this has been the other cost component in the income statement has significantly come down as percentage of sales. This signifies that the company enjoys some operating leverage with size.
The company has 6 integrated in house facilities for producing leather footwear located in UP and Uttarakhand. Capacity for producing shoes is 6.4 million pairs per annum ; its operating at 80 % capacity utilization currently. The company has the largest tannery in the country with a capacity of 38 mn sq ft. The tannery is operating at a capacity of 50 percent ; OPM 5 percent. This is expected to go up in the coming years. As the sales volume of the shoe business improves the utilization of the tannery will improve , as 50 -60 % of the leather produced is consumed internally by the company.
Export
Exports account for 75 percent of the sales for the company.
For FY 16 Revenue = Rs. 928 cr
Export = Rs. 692 cr .
UK = Rs. 464 cr ( 68 % of exports.) ; US = Rs. 89 cr ( 13 % of exports).
Hence revival of economy in UK is very crucial for the company , it is being estimated that the economy has already hit rock bottom in UK and is expected to rebound by FY 18. 80 percent of export sales of the company is of white label footwear while balance is of the companies brand Red Tape and Oak Trak. The company sees a great growth potential in the market of US, where it is growing at CAGR of 83 percent for the last 5 years. The company is also trying to increase its presence in new markets like the Middle East .
Domestic Business
Domestic business contributes roughly around 25 percent of the turnover.
FY 16 domestic business revenue = Rs. 236 cr. ;
Leather business contributes around 80 cr and the remaining is through footwear sales( branded).
Company is taking a number of steps to improve its domestic branded sales.
- Online presence
Company is improving its sales through e- commerce channels via Flipkart, Amazon , Myntra, Snapdeal, etc. it has set up a 70,000 sq ft warehouse in Noida to serve these channels. The range of products available online are different from the ones in the brick and mortar retail stores.
- Launched a new brand called ‘ Bondstreet’.
This is for the affordable segment. Price range of the shoes is Rs. 1200 – Rs. 1900. This will be manufactured by a third party and will be polymer based. Since majority of Indian Market is in affordable segment and unorganized sector , this can be a great growth opportunity for the company.
The products in this segment will be launched at a discount to its peers initially and sold through a separate distribution channel . The company is targeting some rural areas by the end of FY 17 for selling the products of this brand.
- Increasing sales of Red Tape.
The company already has 130 EBOs spread across the country. It is planning to set up 50 more EBOs in the next 2 year taking the number upto 180.
Key Risks
- Forex Volatility – Since 75 percent of revenues are exports, currency rate fluctuations can be a threat. The company hedges its export sales to avoid this.
- Shortage of skilled labour – 90 percent of total workforce in India is unskilled or semi-skilled. Skilled labour is important in the leather industry. The government of India has taken steps to solve this. Leather Sector Skill Council has been set up.
Investment rationale
- Focus on domestic sales growth
The company is focusing on increasing its domestic sales growth by going into e- retail , by increasing number of EBOs , by launching a new brand in the affordable segment .
- Revival of the economy in the UK.
Since 50 percent of the revenues of the company is from UK, it is very important for the economy of UK to do well. It is being estimated that the economy of UK has already hit rock bottom and is supposed to be back on track by FY18.
- Increasing presence in USA and penetration into new markets.
The company has been growing at a CAGR of 80 percent in the US since the last 3 years . The US represents a huge market for such a company since discretionary spending by the average American is among the highest in the world. The company has already tied up with five major retailers in the US. The company is also exploring new markets such as the Middle East.
- Improvement in ROCE, ROE ratios and OPM margins expected in the future.
The company is completely integrated. It produces its own leather and consumes it to produce footwear. The capacity of the tannery of the company has been recently expanded by spending a capex of Rs.100 cr. The tannery is currently operating at utilization of fifty percent and 5 percent OPM. With the utilization of tannery going up, greater amount of leather will either be sold or used by the company for shoe production. Hence this will improve the margins of the company. This will also lead to an improvement in capital return ratios.
- Debt has started reducing on the balance sheet
The company has a debt of over 160 cr on the balance sheet , and the interest payment in FY 16 was around 31 cr. The debt component on the balance sheet is expected to reduce which will save interest costs.
If we analyze the debt of 160 cr –
138 cr is short term borrowing and the rest 22 cr is long term borrowing. This is because the inventory portion on the balance sheet is 240 cr. Of this 127 cr is finished goods ( goods in transit) .This portion represents the finished goods which are being shipped abroad. This portion of inventory with respect to sales will come down as the domestic sales growth is expected to be higher than exports. Also the raw material component of inventory will come down with increase in capacity of tannery as most of the raw material will be made internally.
Indo Count has been one of the biggest multibagger in the last 5 years. But due to the presidential elections in the US its H1FY17 witnessed muted growth. The stock has also corrected quite a bit in the last few months and looks an interesting opportunity now available at less than 12 P/E multiples. The company looks to be at its inflection point moving from a B2B player to a B2C player. The company is also looking poised for sustainable growth as it putting in a lot of capex for expanding its facilities, for upgrading its facilities, and expanding to new markets.
Textile Industry Scenario – Indian textile industry is one of the key sector of the economy in terms of contribution to economic activity , employment generation , external trade and foreign exchange earnings. This sector is expected to grow 5 times in the next decade. This sector contributes 5 percent to GDP and is the second highest employer in the country after agriculture employing 105 million people indirectly or directly.
Just like the growth of the IT industry and the pharmaceutical industry experts are expecting the textile industry to be the next big thing given the favourable industry dynamics.
Currently India is the second largest producer of textiles after China . It is projected to over take China by 2022. India has a number of competitive advantages over China-
- India has overtaken China as the largest cotton producing nation in the world. Unlike China our textile industry is predominantly cotton based. This was achieved due to the genetically modified cotton in states of Gujarat, Maharashtra , AP.
- There has been a wage hike in China. This is making it less cost competitive with respect to India , since textile is a labour intensive industry.
- The Indian Government has been actively supporting the industry-
- there are plans to set an integrated textile park as a part of ‘Make in India’ mission.
- the government plans to come up with a new textile policy in order to generate 35 million additional jobs in this industry in the next decade. FTAs between India and Europe , US, China and Canada can be a growth driver for the industry.
- TPP agreement can be repealed under Trump Presidency which can be a boost for Indian Exports to the US.
Indo count was incorporated in 1991 as a 100 percent export oriented unit. It was into yarn production. From 2007 company has ventured into bed linen. It took this step following the end of the quota regime in USA , UK and Canada.
Company is one of the leading vertically integrated company into home textiles and 4th largest supplier to USA. From manufacturing to branding they do it all.
Spinning- They can produce 14,000 tons of combed cotton yarn per year. They have 3 spinning plants
80, 016 spindles at Kolhapur ; 59520 spindles at Gokul Shirgaon Plant and 20,496 at PMSL.
Weaving – All weaving equipment is obtained from the best manufacturers in the business and they are equipped with the best weaving facilities.
Processing – This includes the process of bleaching, dyeing, printing and finishing. It is carried out by the latest technologies at Kagal MIDC plant, Maharashtra
Cut and sew- Have the best automated equipment for producing sheets, matresses , pillows etc.
MCap- 3017 cr. ; P/E = 12; ROCE = 50 % ; ROE = 58% ( follows an asset light model outsources majority of yarn production)
The company has sales growth of 26 percent over the last 10 years. ( Good sales growth)
The company has improving OPM margins – around 4 % in 2012 to 21% in 2016.
The fixed asset turnover has drastically improved from 0.8 in 2009 to 5 in 2016.
The credit rating of the company has improved to ‘A’ for long term bank facilities and “A1” for short term bank facilities recently , which will bring down the interest rates for the company.
This increase in margins have been due to the company venturing into more value added products ,backward integration .
The major sources of revenue of the company is home textiles department.
In 2016 following developments have taken place shaping the company for future.
– capacity has been increased to 90 million meters per year from 68 million meters per annum.
The company has also announced a capex plan of 25 cr over the next two years to venture into the domestic home textile segment. It has partnered with Aseem Dalal of Bombay Stores for the same. It has launched a brand ‘ BOUTIQUE LIVING’ in India for home textiles . This brand was launched in India through Indo Count Retail Ventures Ltd. . Product was launched in July 2016.
Indocount launches 3 brands in USA – ( BOUTIQUE LIVING/ PURE/REVIVAL) ; this will be launched in other markets next year.
Indocount takes license of prestigious brands like Harlequin/Sanderson/ Scion. They have an agreement with Walker GreenBag PLC UK to launch the brand in the North American markets. Scalability of this venture and the possible revenues for the next five years need to be studied.
US is the major market for the company , contributing around 65 percent to its revenues. They are also expanding into other major geographies like Europe, UK and Australia. They have big retailers as their clients like Target, Wallmart, JC Penny,etc.
The company is on the course to incur two phases of capex.
Phase 1
The amount incurred will be Rs. 175 cr. This will be met through internal accruals. Rs. 110 cr have already been capitalized as of Sept 2016.
- Capacity of processing will be increased from 68 mn/meters per annum to 90 million metres oer annum by March 17 ( 70 cr)
- effluent treatment plant – completed ( 50 cr)
- Automation of cut and sew – warehousing by March 2017. (55 cr)
Phase 2
The amount approved by the board is 300 cr. The project will be completed by March 18, with a debt to equity 1:1.
- Uprgradation of existing facilities
- Investment in additional weaving capacities
- Value added equipment for delivery of fashion and utility bedding
The company has also announced a capex plan of 25 cr over the next two years to venture into the domestic home textile segment. It has partnered with Aseem Dalal of Bombay Stores for the same.
The phase 1 and phase 2 expansion are projected to add roughly 2 – 2.5 times the investment to the topline of the company ; that equals roughly 1000 cr of additional revenue at a EBITDA of 23-25 percent( high due to value added products, better operational efficiency, and backward integration).
Salient Points from recent Promoters Interview
- consciously moving up the value chain for better margins and adding new geaographies as their market.
- we enjoy a preferred supplier status for most of our clients
- not in the commodity business and do not compete on price point.
- striving to emerge as a one stop solution for all bed related home textile products, adding high end products like utility bedding ,fashion bedding , and institutional linen to existing range of products.
- we follow an asset light model , outsourcing around 70 percent of yarn production ; hence the company has consistently good ROCE ratios of over 40 percent.
- india is at a competitive advantage compared to countries like Bangladesh , Pakistan due to stable geopolitical situation and greater compliance to environmental and labour laws. Indian textile companies are at disadvantage in Europe due to the import duty on them . If India signs the FTA agreement with Europe , it can be a major boost to the Indian companies.
Key Risks
- Rupee appreciation can be a risk at it derives majority of its revenue through exports. The company enters into forward contracts of 6 to 12 months on receiving orders from the clients, this makes the risk more predictable.
- Since 65 percent of revenues are derived from USA, slow down in US can be a risk to the company. However the company is mitigating the risk by trying to enter new geographies.
- Price of RM risk. Increase in price of cotton may decrease the margins of the company. Also increase in cotton to polyester price ratio can be detrimental for the company, as the company’s product might get substituted by the customers. The company has mitigated this risk by following the practice of make to order. This allows the company to incorporate changes in its pricing as per the changes in RM price.
This also leads to lower inventory levels, shorter working capital requirements.
Hence the company looks interesting from a long term view for the following reasons
- the company is in the textile sector; the Indian textile sector looks one of the most promising sector in the next ten years poised for growth. Indian textiles are having an increasing acceptance in major markets like the US.
- management has a hunger and vision for sustainable growth. Sustainable is very important in the textile industry since being a capital intensive industry companies with huge loans on the balance sheet can be easily in trouble if they don’t deliver for a couple of years.
- Company has been going into more value added products, expanding into new geographies, putting on capacities. Company is trying to become a one stop solution for bed linen division in home textiles.
- company is available at P/E multiple of 12, which is bound to get re rated once the company grows as envisaged.
- The company had a debt of 450 cr as of March 14; have brought it down to 180 cr. As of now. We like such companies which can generate good CFOs and use it to bring down their debt over the years. Also the improvement in working capital management has contributed to bring down the short term debt on the balance sheet.
Shree pushkar – specialty chemicals
Mcap= 511 cr.; P/E= 19 ; ROCE= 21.86% ; ROE= 17.72% , promoter holding is around 60 percent.
Single Plant located in Lote Parshuram , Maharashtra
Manufacturer of dye intermediates, reactive dyes, cattle feed , fertilisers, acid complex .
In 1993 company was engaged in trading of chemicals. It switched to manufacturing of dye intermediates from 2000 .Over the last 15 years company has done backward integration by putting up capacities for manufacturing RMs used in dye intermediates. It has a capacity of 8000 MTPA for dye intermediates. Main dye intermediates compounds involve Gamma Acid, K-Acid, Vinyl sulphone, R-Salt, Meta Ureido, etc. The company is the worlds largest manufacturer for K Acid. Dye intermediates are used for making dyes which are further used for colouring textiles.
In H1 FY 2017 this dye intermediate division contributed to 72 percent of revenues of the company. The clients of the company include big companies Huntsman Corporation USA, Arochroma Switzerland. Its operated currently at an utilization level of around 70 percent. The realisations of vinyl sulphone is Rs. 400/ kg and of Hacid is Rs. 425/kg. Vinyl sulphone is a product which is in great demand, due to the closure of factories in China(environemental concerns) and price of this product is expected to remain high., as per the guidance given in the Q2 concall. (http://www.moneycontrol.com/news/business/what-risevinyl-sulphone-price-means-for-indian-dye-makers_7459061.html)
http://www.textileexcellence.com/news/details/1081/dyestuff-makers-will-see-revenues-rise-of-40-50–this-year4
Since the major focus has shifted from China to India for the manufacture of these products many Indian companies like Kiri Industries have been putting up huge capacities for the manufacture of these products. However given the fact that Shree Pushkar is completely backward integrated it should be able to fight competition on a price basis. The world market for dye intermediates and the amount produced in the factories of China need to be studied to get a better picture.
The company has decided to forward integrate by starting the manufacturing of reactive dyes. Reactive dyes is a special type of dye which makes covalent bond with the fiber and become a part if it. It has put up a plant of capacity 3000 MTPA which started its commercial production from May 2016. The capacity will be increased to 6000 MTPA by Q3 2017 with a marginal capex of 5 cr. According to latest concall the management says achieving a capacity utilsation of 35- 40 % will break even this project. The amount of capital involved in this expansion and forward integration plan will be around 60 cr. The money for this expansion plan was raised via an IPO in August 2015. (61 cr was raised).
One of the great features about this company is that it has a zero waste discharge factory. Effleunts generated from one product manufactured are used to make other products. Products like fertilisers , soil conditioners and cattle feed are made by these waste effleunts.
Fertiliser
SSP , NPK , SOP , Soil conditioners are some of the products made in this division. FY 16 sales of fertilizer volume was 55606 MT and revenue was 48cr.( 20 % of total). The capacity utilization of the division was 48 percent implying a capacity of 1.16 lakh MT. The sales were a bit low last year due to delay in monsoons. The company obtained a NPK fertilizer license after a struggle of 2 years. 20000 MTPA capacity was put up which got commissioned in Feb 2016.
10,000 MTPA capacity of SOP is put by the company whose commercial production has started from Sept 2016. HCl is generated as an effluent during manufacture of SOP. Hence to follow zero discharge policy the company will be using that HCl to make calcium chloride granules. 6500 MTPA capacity is planned of calcium chloride whose commercial production has started in November.
They have an exclusive marketing arrangement with DCM Shriiram in the fertilizer segment for SSP in Karnataka and Maharashtra. They have launched its own brand Dharti Ratna in Western Maharashtra for soil conditioner.
Acid Division
The products of this division are mostly captively consumed and they include Oleum, Sulphuric Acid , CSA . This division contributed only 4 percent to the revnues in H1 FY17.
Key Strengths of the Company –
1. It is backwardly integrated hence making the products more cost efficient.
2. Has zero debt on its balance sheet.
3. Its becoming a one stop shop for the textile industry. The management plans to go into textile chemicals next year, they have already purchased land for it( as said in the latest concall)
4. It is a zero waste company. In fact the effluents are used to make new products making the company more cost efficient. It also saves the cost to treat the effluents.
The company has delivered a strong financial performance over the last 5 years.
Revenue CAGR – 14 % ; consistently increasing capacities by the cash flows generated from the business
EBITDA CAGR- 18% ; as the OPM has improved over the years. The management believes the OPM is going to be around 20 prcent for the year owing to more value added products and also higher realisations on dye intermediates
PAT CAGR – 43% ; due to financial leverage as the company has paid down its debt over the years.
The manangement has given a guidance of revenue of 350 cr this year followed by 450 cr next year, based on the expansion plans. ( Revenue was 250 cr in FY 17)Also the prices of some of the products are commanding a higher realisations due to higher demand, the company is venturing into forward integrated products, an EBITDA of 20 percent will be achievable.
Key Risks –
1. Competetion . Since the focus has shifted to India from China , many companies are putting up capacities to manufacture dye intermediates. The market for this segment, the growth expected in the market and the capacities being put up by the cos need to be studied in order to understand this point better.
2. The revival of the factories in China which were shut down for dye intermediates.
3. Unpredicatble monsoons is always a risk but that was not the case this year .
Given the fact its a fast growing company, has been increasing its EBITDA margins, is manufacturing products which have a high demand, has zero debt on the balance sheet, a sincere and visionary management, is making the right capital expenditures for further growth , has increasing it ROCE/ ROE ratios over the years( signifying better utilization of assets) it makes an interesting case for long term investing point of view.
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