Background / Overview
Business verticals
The company operates in 3 business segments
End user industries
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In-house capabilities
Manufacturing capabilities
Revenue split (domestic vs exports)
High entry barriers
Raw material sourcing
Stable relations with suppliers
Clientele
Capacity
Capacity utilization – 80 to 85% utilization.
Two major capacity expansion planned:
Seasonality
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Forward integration
Competition - Most of their competitors are based in Europe, Japan and China
Financials
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Key Points from last 2 con-calls
Q1 results
Possible Risks
Raw material price fluctuations
In the recent con-call – there was a point regarding drop in lithium prices. Lithium prices have dropped about 45% in last 6 months (Link:) )
The management acknowledged this and mentioned that they would be able to maintain per kg margin in that business segment. However this fluctuation in RM prices is a risk one needs to be wary of.
Negative free cash flow:
Not able to generate free cash flow currently owing to high operating costs (detailed earlier in the note)
Delay in capacity expansion – The Company has guided for capacity expansion in organic chemicals to be completed by end of this FY. But this is a possible risk as any delay in cap expansion would mean inability to meet additional demand and can dampen next year’s revenue target.
Liquidity Risk
Long term borrowing ~ 90 Cr. This includes the 50 Cr term loan availed recently for capacity expansion.
Short term borrowing 102 cr up from 65 Cr last FY.
In case of any delay in planned capacity expansion – might necessitate the need of further borrowings - short term or long term.
References:
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Low float - Low float scrip
Disc: Invested; at sub 400 levels.
20 Likes Gujarat Fluorochemicals: A hidden fluorine story varunm2112 4Q1 concall notes:
Our domestic and export mix stood at 62% and 38%
we are at 50% of bromine derivatives; about 30% of advanced
intermediates(8-10% of this is CRAMS business) and about 20% of lithium derivatives.
most of the advance intermediates we synthesis are PATENT protected
historically, what we wanted to do is generally not depending too much on a single molecule.And for future growth, being in those many molecules where you can quickly capture growth.
We are having capacity constrain and not demand constrain.
FY21 guidance of 350crs and FY22 guidance of 450-500crs stays
Leading manufacturer of Bromine (organic) and Lithium-based (inorganic) specialty chemicals, operating since 1991. Growing contribution from Custom Synthesis and Manufacturing.
Organics
Bromine Compounds: Organic compounds containing chlorine, fluorine, iodine-based combinations thereof and others including grignard reagents.
Advanced Intermediates: Combining bromination with other chemistries to create forward- integrated value-added products.
Custom Synthesis & Manufacturing: Products developed for specific customers. Process know-how and technical specifications are developed in-house
Inorganic: The portfolio includes specialty, inorganic lithium-based chemical products which find applications across multiple industries
56% domestic, 44% exports. 80% revenues came from organic chemicals vs 20% from inorganic chemicals in H1FY21. Company’s business has some seasonality with H2 being better than H1; driven by strong demand from Europe as orders tend to scale up in October-November and further accelerate from January. Lithium demand tends to be strong in Q4 as demand from HVAC segment. Demand from the agrochemicals segment is linked to the crop cycle and is stronger during H2.
Customers across multiple industries including Pharma, Engineering and Agrochem. Key export geographies include USA, Europe, Japan and Middle East (27 countries).
End user industries for Organic: pharma, agrochemicals, electronics chemicals, flagerance, flavor
End user industries for inorganic: eco friendly VAM for air/cooling, pharma, specialty polymer, construction chemicals
Selected clients: Austin, sun pharma, solvay, Herero, divis, hikal, cbc, Mylan, thermax, Voltas, Kirloskar, Piramal, Aurobindo
Executing Brownfield manufacturing capacity expansion. 33cr capex in H1FY21 compared to 10.1cr. based on discussions with several leading global innovator companies (need to find who these are. Are they same as the selected clients above?), and demand visibility for new product offerings, we are already planning the next round of organic production capacity expansion at Dahej SEZ unit to be implemented in FY22. Future planned capex is as follows:
Attribute/ Phase of capex | Phase 1 | Phase 2 |
---|---|---|
Planned Capex (in cr) | 75 | 55 |
Expected Revenue post full capacity utilization | 500cr | 660 cr |
Comissioning time | Q4FY21 | FY22 |
Glass lined capacity to be added (in litres) | 126000 | 78000 |
Non-glass capacity added (in litres) | 0 | 32000 |
Total installed glass-lined reactor capacity | 256000 | 334000 |
Total installed non-glass reactor capacity | 24000 | 56000 |
Promoters are pioneering technocrats with substantial domain expertise; cumulative experience of more than six decades.
Developed strong R&D capabilities with a dedicated in-house team. 205 Products developed by in-house R&D. 10% of workforce in R&D. Manufacturing units certified on Quality & SHE management systems. Specialised Business Model with high entry barriers (Need to quantify the entry barrier). Company is planning to Increase Custom Synthesis & Manufacturing portfolio
5-year Revenue CAGR of 29%. 5-year PAT CAGR of 42%. Revenue of 82cr in Q1FY21 (12% growth) driven by better product mix led by increased demand for new products from existing and new customers. PAT of 7.4cr in Q2FY21. Moderate PAT growth (2.6%) was due to higher depreciation from the new capacity added, increased finance costs related to capex done last year & a onetime impact of Rs. 0.55 crore in Q2 FY21. Net working capital came down by 12% from 153.1cr (Mar-20) to 134.9cr (Sep-20). In H1FY21, Cash Flow from Operations expanded on the back of lower working capital and internally financed capital expenditure. Historic trends for a few key ratios/numbers:
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Company is available at TTM p/e of 60 which is steep. One needs to estimate the opportunity size and quantify the competitive advantages at the next level of detail in order to understand whether or not the valuation is steep vis-a-vis the opportunity size. The company has significant debt. Net debt of 157 cr versus net worth of 136 cr. This is a microcap company trading at high valuation with sufficient MF holding (16% of all shares). If the business underperforms, MF selling can lead to large share price movement and vanishing of liquidity.
PS: My understanding right now is only based on Q2-FY21 investor presentation. I continue to read and learn more.
10 Likes Akhilesh_Halageri 6/
Head of Business Development, previously worked at PI Industries for a long time (~15 years).
Disc: not invested
5 Likes Harsh04 7Some red flags I see :
Co. Not reporting positive CFO since 2018, even though the net profit CAGR is great.
7 Years Aggregate: CFO: -5.99 Cr, EBITDA: 188.69 Cr, Net Profit: 81.89 Cr
(Source - Valueresearchonline)
Short term debt and working capital increasing consistently from 30Cr & 23 Cr in 2017 to 102 Cr and 81 Cr in 2020. Presumably because company is not able to convert the net profits into cash ?
Recievables are about 25% of sales and Inventory is about 35% of sales. So, looks like hal f of the company’s revenues are stuck here and not abled to be converted to cash ?
Decrease in promoter shareholding between Mar 2020 to Sep 2020, at levels between 340 to 520 which is certainly at a steep discount to CMP
Bromination - The process of treating a substance with bromine: especially, for the introduction of a bromine atom in place of hydrogen (in an organic compound).
Good insight from Edelweiss , thanks to @Worldlywiseinvestors for sharing.
Two key raw materials are Bromine and Lithium , spot prices can be spotted from the below links.
Keys Risks
Fluctuation in the RM prices of Bromine and Lithium, later is in very high demand due to EV revolution.
Debt levels are high (mainly due to ongoing CAPEX )
A Grignard reagent or Grignard compound is a chemical compound with the generic formula .mw-parser-output .template-chem2-su{display:inline-block;font-size:80%;line-height:1;vertical-align:-0.35em}.mw-parser-output .template-chem2-su>span{display:block}.mw-parser-output sub.template-chem2-sub{font-size:80%;vertical-align:-0.35em}.mw-parser-output sup.template-chem2-sup{font-size:80%;vertical-align:0.65em}R−Mg−X, where X is a halogen and R is an organic group, normally an alkyl or aryl. Two typic...
An example of the Grignard reaction is a key step in the (non-stereoselective) industrial production of Tamoxifen[19] (currently used for the treatment of estrogen receptor positive breast cancer in women)
.html (Bromine Spot Price)
Lithium - 2022 Data - 2017-2021 Historical - 2023 Forecast - Price - Quote - Chart (Lithium Spot Price )
NeogenChemicals_Coverage.pdf (3.3 MB)
4 Likes sahil_vi 9 Rafi_Syed:spot prices can be spotted from the below links.
They are really of no use for Neogen because they have a long term contract with suppliers and prices are fixed for a year at beginning of the FY.
From Q2FY21 concall notes:
Rafi_Syed:As a policy, because bromine is a key raw material for us, we get into annual contract for bromine. But this we got into, in the month of let us say April or May, and at that time, there was a slight, I would say around 10% or 15% increase in bromine as compared to the previous financial year. within India, last couple of months, bromine prices have been very volatile and has even increased to 30% to 40%, but that is only for people who are buying spot
Fluctuation in the RM prices of Bromine and Lithium
IMO this is not a key risk due to their annual contracts. Not sure about lithium but that part of business is also much smaller.
3 Likes kartik_bhat 10Carrying inventory was addressed by the management during one of the calls. It is a trade-off that they are facing between immediate benefit vs de-risking & future growth. They have consciously chosen that they don’t want a single molecule to contribute more than 15% of revenue. Higher turnover from a single molecule involves a concentration risk.
They have chosen to trade-off immediate benefit in favour of a de-risking. And when the additional capacity comes on-board they have the option of growing in those many molecules with multiple customers.
Regarding working capital cycle - they have indicated negotiating terms with their key vendors regarding credit term & seem to have got a favourable response.
So its something to keep a watch on if this does get reflected in better cash conversion in upcoming quarters.
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Promoter holding – have mentioned in my note above that this stake was picked up by Malabar India Fund.
6 Likes kartik_bhat 12Notes from Q3 FY 21 call
• Company has received contract manufacturing business for 2 molecules from the global customer. (discussed in Q2 call). These innovator companies they work with- sometimes they get partial technology knowhow on which they build on; whereas at times they have to start from scratch
• With these new contracts, revenue % from custom synthesis & contract manufacturing likely to increase to upto 20% in 2-3 years (from existing 10%)
• Lithium & RM pricing – while there was some volatility, there is a certain minimum price realization which is guaranteed
• Working capital – Owing to Covid, there was a higher stock build up. That is being released gradually. While some measures have been taken, some working capital will stay – as the company grows. More work likely to happen next year once they have additional turnover
• Revenue target for FY 22 is 450 Cr. With additional capacities coming in, next FY, capacity available in FY 23 would be 650 Cr.
• Turned cash flow positive in Sep’20 and it has improved further in Dec 20 (Q2 result)
Disc: Invested
6 Likes vnktshb 13Update on capex
Update on working capital
Disclosure: Invested
6 Likes vnktshb 14/
Company has guided for Rs450crs of revenues in FY22 vs Rs336crs in FY21
4 Likes vnktshb 15image743×312 73.1 KB
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4 Likes VIMAL_AGRAWAL 16thanks you so much sir will you please share edeilwess and wordly wise investors link , thanks in advance.
vnktshb 17Did anyone attend the concall or have link to its recording?
kartik_bhat 18Key points from the Q4 call
450 Cr topline guidance for FY 22 remains
Capex update
Gross margin drivers in this qtr – 2 factors
Advanced intermediates business
Does higher revenue from CFM mean better margins?
Working capital
Debt levels
New Hires in Sr Mgmt side
Whether FY 21 growth is subdued considering niche space they operate in?
Neogen
Key management call takeaways
Organic Chemicals
Production at Phase-I greenfield project at Dahej SEZ commenced in May’21, which should take total revenue potential of Neogen’s capacities to INR500cr. Asset turnover for the new facility at Dahej is expected at 2.5-3x.
While manufacturing of initial commercial batches has commenced, product quality assurance and customer validation processes are in progress post which full commercial production will begin.
The Dahej plant will enable Neogen to deliver greater value-addition products through multi-stage processes and complex chemistry. In the first year of operations, management expects EBITDA margin of ~18%. However, margins should inch higher with normalisation of the plant and increased contribution from Advanced
Intermediates segment.
With new facility being operationalised, management has reiterated revenue guidance of INR450cr for FY22. Contribution from existing two long-term CSM contracts will be INR60-80cr.
On optimum utilisation at Dahej facility, management expects to achieve overall revenue of INR650-670cr by FY24.
By FY24, management is aiming to achieve product mix of – 40% for OC, 40% for Advanced Intermediates (including 20% contribution from CSM) and 20% for IC. Expected increase in contribution from Advanced Intermediates and CSM business over the next 2-3 years should lead to margin improvement.
With increasing revenue, R&D expense should increase to >1% of overall revenue; additional capex would be incurred to fund existing R&D projects.
In Q4FY21, both OC plants achieved utilisation of ~90%.
CSM engagements are progressing well through stages and some of these should materialise in H2FY23 or FY24.
Inorganic Chemicals
For the year, improvement in gross margin was on account of product mix change as well as lower raw material prices.
Utilisation level at IC plants stood at 60-70%.
Capex
In continuation with initial capex of ~INR75cr for the Dahej facility, second phase of capex to the tune of INR55cr has been currently undertaken. Of this, ~INR25cr has been incurred already and remaining INR35cr will be incurred over FY22.
While planned reactors will be installed over Q3FY22 and Q4FY22, expansion activity will be completed by FY22. This additional capacity will contribute incremental revenue of ~INR150-175cr.
Others
Maintenance capex would be in the range of INR20-25cr.
Logistical constraints have eased marginally from what was observed over Mar-Apr’21.
Prudent inventory management provided cushion against challenges pertaining to raw material procurement. However, impact of logistical issues was felt on the export front to some extent.
While working capital may rise in FY22 due to operationalisation of Dahej facility leading to higher inventory along with an increase in debtors (based on expected rise in exports), it should normalize to FY21 levels towards the close of FY22.
Additionally, on the supply front, management is eyeing on increasing credit days for its key raw materials.
Going forward, RoE and RoCE should improve slightly in FY22 and by at least 2% post that. Management would like to keep D/E ratio below 1.25x and Debt/EBITDA below 3.5x.
With environmental clearances in place and land availability at Dahej site, new capex will require comparatively less turnaround time. This will enable the company to grab opportunities in agro and pharma related CSM business over the next 3-5 years.
5 Likes vineet_mittal 20One thing, I liked about the management is the low-balling in terms of forecasting.
Many analysts tried to get the higher estimate but Management only guided for 650-670crs for FY24.
It is refreshing to observe a change in terms of guidance, otherwise lot of companies are guiding for the moon.
I generally liked that they are pioneer in CDMO for Bromine products. Currently they accounts for 5% of this market. Given long experience of management with Bromine, it has a good runway for growth.
This can be a niche in making.
Disc: invested
8 Likes vnktshb 211QFY22 11% YoY growth in revenues and 20% gains in PAT.
Production of Organic Chemicals at the newly constructed facility in Dahej has commenced with trial commercial batches. Customer validation, product quality assurance and final statutory permissions are underway.
Once commissioned, this facility will significantly bolster the performance momentum of Neogen, as this site will allow the company to undertake assignments of complex chemistries which require multiple steps.
Company is confident of fully commissioning this plant in Q2 of the current year and all efforts are in this direction. Company’s revenue guidance of Rs450 crore in FY22 (v/s 344crs in FY21) remains unchanged.
1 Like