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
Operating Efficiency Analysis
Margin of safety i.e. Self sustainability in the Business
Business Analysis
Size of opportunity
Fund flow analysis
Management Analysis
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.
In continuation with the Fundamental Analysis of NGL Fine-Chem Limited, I have analyzed here the financial section only. I want to read and analyze the businesses in depth with the above mentioned framework step by step for better understanding and recording of data.
I will read, analyze and post the Operating Efficiency Analysis of NGL Fine-Chem Limited, Margin of safety i.e. self sustainability in its business, Business analysis of NGL Fine-Chem Limited, Size of opportunity in my next post.
Also Read
Operating Efficiency Analysis of Laurus Labs Limited
Reference :
Screener
Annual Report
Credit Report
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