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.
Operating Efficiency Analysis
Margin of safety i.e. Self sustainability in the Business
Business Analysis
Size of opportunity
Fund flow analysis
Management Analysis
I have already analyzed the financials of NGL for previous 10 years in a previous post i.e. NGL FINE CHEM LIMITED : FINANCIAL ANALYSIS OF LAST 10 YEARS.
Here, I will be focused on the operating efficiency analysis of NGL Fine chem Limited.
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.
In continuation with the Fundamental Analysis of NGL Fine Chem Limited, I have analyzed here the operating efficiency of NGL Fine Chem Limited. Before operating efficiency analysis, I have analyzed the financial analysis of NGL Fine Chem Limited.
Financial Analysis Of NGL Fine Chem Limited
I want to read and analyze the businesses in depth with a framework step by step for better understanding and recording of data.
I will read, analyze and post the Business Analysis of NGL Fine Chem Limited, Size of opportunity for NGL Fine Chem Limited, Industry and company overview, Fund flow analysis and management analysis in my next post.
Reference :
Screener
Annual Report
Credit Report
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