by Suhani Adilabadkar
With the Nifty Pharma down by about 17% from its 52 week high of 10,542, contrarians are ready to hunt in the beleaguered industry which was once regarded as a dollar minting behemoth. The Indian Pharma industry has been under pressure over the past two years due to high competition, channel consolidation and strict FDA regulations in the US, their biggest market.
Though most pharma bigwigs have undergone heavy corrections, value pickers are betting on many undervalued small & midcap companies exhibiting strong future growth prospects. IOL Chemicals & Pharmaceuticals Ltd is one of those recently turning up on our screeners (the company entered Trendlyne's DVM screener in the last week of March). IOL Chemicals is one of the largest producers of Ibuprofen in the world with a global market share of about 30%.
- Though IOL started out as a Specialty Chemical Producer, its API division now contributes more than half of its revenues.
- Analysts are optimistic about the company’s growth prospects due to company’s aggressive expansion, positive management commentary and successful turnaround over the last seven quarters.
- Can be a serious contender for long-term investment
What does IOL Chemicals do?
IOL Chemicals & Pharmaceuticals started out as a Specialty Chemical manufacturer and later diversified into pharmaceuticals with the commissioning of its Ibuprofen plant in the year 2000.
Currently the firm operates in two verticals, APIs and Specialty Chemicals. The API division manufactures Ibuprofen and 4 other APIs, Metformin (anti-diabetic), Lamotrigine (anticonvulsant), Fenofibrate (anti cholesterol) and Clopidogrel Bi sulphate (anti Platelet).
The specialty chemicals division caters to flexible packaging, pharmaceuticals, textiles, food processing, pesticides and paint industry by manufacturing Ethyl Acetate, Iso Butyl Benzene (IBB), Mono Chloro Acetic Acid (MCA) and Acetyl Chloride which in turn are raw materials for the production of Ibuprofen. As a result IOL is world’s only integrated Ibuprofen plant approved by USFDA, EUGMP, CEP certification & WHO GMP.
Though IOL started out as a Specialty Chemical Producer, its API division presently contributes more than half of its revenues. Ibuprofen the flagship product of the company with an installed capacity of 7200 TPA, is known to users as a medication that reduces pain, fever and inflammation. The company has successfully completed Unit IV in the December quarter FY18 to manufacture Metaformin, with an installed capacity of 3200 MT. In the previous September quarter, Unit III was commercialized to enhance existing pipeline of APIs, Lamotrigine, Fenofibrate and Clopidogrel. IOL’s Indian clientele includes Dr Reddy’s Lab, CIPLA, ITC, Asian Paints, Pidilite, Rallis India, Uflex and Hindustan Polymide. On the other hand, exports are mainly to Europe, Latin America, Africa, and the Middle East.
The company hit a rough patch between 2014-16 reporting negative bottom-line due to higher operating expenditure and heavy finance costs. Since March 2016, growth momentum has been maintained for both top & bottom-line and interest expenditure curtailed leading to healthy operating margins improving from 2.93% in 2015 to 14.31% by the end of March FY17.
IOL has turned around from a loss of Rs. 62 mn in December 2015 to a Net Profit of Rs. 88 mn in December quarter FY18. The net profit has multiplied 8 times and turnover has doubled over the previous 7 quarters. Interest expenditure as a percentage of revenue has declined substantially from 11% in March 2016 to 6% in December 2017. A major chink in the armor however is the high debt equity ratio at 2.36 as on March 2017.
The company has successfully completed Unit III & IV through internal accruals exhibiting management’s commitment to improve its debt equity ratio. IOL plans to invest Rs. 1000 million annually for the next two years to increase its capacity by 30% every year to meet growing demand of Ibuprofen. The company is in the process of expanding its current Ibuprofen capacity from 7200 TPA to 12000 TPA by the end of the current financial year. In addition to that, IOL has been favorably impacted by firming up its Ibuprofen prices globally and prices are also expected to go up in the domestic market.
Analysts are optimistic about the company’s growth prospects due to the company’s aggressive expansion, positive management commentary and successful turnaround over the last seven quarters. Thus in the present scenario of volatility and systematic uncertainty, IOL Chemicals & Pharmaceuticals seems to be a serious contender for long term investment.
Suhani Adilabadkar is a Research Analyst registered with SEBI ((INH200003240)) She has done PGDBA (Finance), MS (Finance) and a Fellowship from Insurance Institute of India. She maintains a blog at oasisfundamentals.blogspot.in.
Disclaimer: Investing in stock markets is subject to market risks. Neither Trendlyne nor the author is liable for losses including consequential losses, claims, or expenses incurred by third parties from following research reports and advisory analysis available on Trendlyne.