From Ibuprofen to Specialties: Company’s Multifaceted Business Model

Current Price-: 550 Rs

Incorporated in the year 1986 , IOL is an API based pharmaceutical company, with substantive manufacturing capacities that has economies of scale and cost supremacy. Company also has extensive expertise in specialty chemicals, which provides it a foundation for diversified growth opportunities and strengthens its business model.

IOL Chemicals & Pharmaceuticals is a 100% debt free, cash rich 35 year old company engaged in the manufacturing and selling of APIs / bulk drugs and specialty chemicals.It is the Largest manufacturer of Ibuprofen with Global share of 35% and as claimed by the management only company world wide being backward integrated for Ibuprofen.

IOL Chemicals today is a leading organic chemicals manufacturer and supplier in India. Apart from API’s company manufactures organic chemicals and intermediates. IOL’s APIs portfolio covers various therapeutic categories, such as Pain Management, Anti-diabetic, Anti-hypertensive, and Anti-convulsant, amongst others. IOL is the only backward integrated company producing all Intermediates and Key Starting Materials (KSMs) of ibuprofen.

The company is having their presence in over 40 countries across the world, which includes Bangladesh, Thailand, UAE, Syria, Singapore, Hong Kong, Pakistan, Egypt, and many others. They have strong business relationships with a number of prestigious clients such as Ranbaxy Labs, Dr Reddy. DS Group, Cipla, Uflex Industries, ITC Ltd, ICI Paints, Asian Paints, Pidillte, Rallis India, Hindustan Polymide, Gujarat Super Phosphate and Avon Organics Ltd etc.

Business Overview / Products

IOL is engaged in manufacturing and selling of chemicals and bulk drugs. Company caters to the pharmaceutical and specialty chemical requirements across both domestic and international markets.

Starting from pilot phase development to scaling up in large batches to commercial production, IOL has been notably successful in launching six products in the market in a short span. All the newly launched and commercialized products are generic APIs and possess robust growth potential in the pharmaceutical market.

• Active Pharmaceutical Ingredients -: Under API vertical, Company develops and provide various essential products that are used by pharma companies across the world to make key medicines.

Presently, company has commercialised various APIs and several new APIs are in the advanced stage of development.

API Commercialised 

• Ibuprofen 
• Ibuprofen Lysinate 
• Ibuprofen Sodium 
• Dex-Ibuprofen 
• Metformin HCL 
• Clopidogrel Bisulphate (Form II) 
• Pantoprazole Sodium 
• Fenofibrate (Micronised) 
• Gabapentin 
• Lamotrigine 
• Ursodeoxycholic Acid 
• Losartan Potassium 
• Levetiracetam

API – Pipeline

• Fexofenadine 
• Quetiapine 
• Fumarate 
• Dextromethorphan 
• Apixaban 
• Mesalazine 
• Nebivolol 
• Lisinopril 
• Valsartan

These APIs produced are used in various therapeutic categories, including pain management, anti-diabetic, anti-hypertensive, anti-convulsant, anti-cholesterol, anti-platelet, etc.

API Portfolio

• Specialty Chemicals-: Under chemicals division, company produces Ethyl Acetate from organic alcohol for use in a variety of end products in markets, including flexible packaging, pharmaceuticals, textiles, food processing, pesticides, and paint industries. Adding Mono Chloro Acetic Acid, Acetyl Cholride and Iso Butyl Benzene are also manufactured.

Iol chemicals is the second largest producer of isobutyl benzene, which is a key intermediate for ibuprofen and we hold about 30% market share 

What is Ibuprofen?

Ibuprofen is a nonsteroidal anti-inflammatory drug (NSAID category belonging to а group of propionic acid derivatives. It is most commonly used for treating medical issues such as pain, fever, and inflammation. The global Ibuprofen market is expected to record a steady growth over the forthcoming years backed by various factors driving growth in this market such as high bioavailability with rapid action, increasing diseases and rising awareness about the drug and its effectiveness.

Looking at its many advantages, IOL is strategically expanding its value-added services for its flagship product – Ibuprofen. IOL has commissioned a separate facility to manufacture these derivatives of Ibuprofen with a peak capacity of 500 MT per annum (expandable to 800 MTPA). Furthermore, with its strategy to enter the Japanese market, IOL has also developed a process for meeting Japanese Pharmacopeia specifications, which will now be manufactured in Ibu-derivative facility.

Currently 85% of IOL’s business in pharma is really Ibuprofen. However going forward, It is expected that this number will dip to below 60% over the next 2 years or so.

Ibuprofen market is pretty mature. It is well established with three or four leading players and the smaller players. Because of the low pricing that is observed now and continuing small players are facing tremendous pressure. It can be assumed that this small players on account of this would exit the market or will move on to different products leading to stability in Ibuprofen market which is expected to be returning into FY23.

Other products

Pregabalin, it’s a very established very large volume molecule and what the company brings to the table that is unique. IOL has no dependence on China in its process and that is something which will differentiate alongside allowing to gain a foothold. Having said that, R&D team is also very aggressively working on Pregabalin. I think in future we hope to offer both products. 

Gabapentin one of the closest competitor being a commoditized, well established sure product, it has a newer age molecule which has competition coming in which is called out by another listed entity as well. But despite the fact company does not expect cannibalization of Pregabalin against Gabapentin due to the distinct advantage company posses as mentioned above

Financials

For Q1 FY 22

• Company recorded 12% growth in total income to Rs. 524 Cr as compared to Rs. 466 Cr in the Quarter 1 of financial year ‘21 
• EBITDA has declined by about 27% on a year-on-year basis 
• EBITDA in first quarter of financial year FY 22 was Rs. 116 Cr as against Rs. 158 Cr reported in quarter first of financial year FY21. 
• EBITDA margin in of financial year FY22 dropped to 22% from 34% in Quarter 1 of  FY21. 
• Profit after tax for first quarter of financial year FY22 stood at Rs. 67 Cr as against Rs. 128 Cr during first quarter of financial year FY21. 
• PAT margin for Quarter 1 of FY 22 was 13% as compared to 27% in first quarter of financial year FY21.

For the year ended March 21

• Total revenue For financial year 21 it has been higher by 4% to Rs. 1,991 crores as compared to Rs. 1,910 crores in the same period last year. 
• For financial year 21 EBITDA has increased by 4% to Rs. 616 crores as compared to Rs. 590 crores in the same period of the last year and EBITDA margin was stagnated at 31% during financial year 21 and financial year 20. 
• PAT stood at Rs. 445 crores as compared to Rs. 361 crores in financial year 20 
• PAT, which grew 23% from Rs. 361 crores to Rs. 445 crores 

Other Aspects

• In Q4 FY21 The share in the chemical segment is higher which was on account of two things that happened simultaneously last year. One was a softening in the demand and the prices for ibuprofen. And second one was simultaneously, company expanded its capacity in ethyl acetate from 87,000 tons to 100,000 tons as a result company got a positive volume variance, positive price variance, and therefore, it was more of an aberration where the chemicals business seemed a lot more than the pharma business.
• In terms of capital allocation this pharma and especially the API and the chemicals business, Company is putting money onto the pharma API side of segments . Company has already put about more than Rs. 20 crores for unit 8 and allocated around Rs. 60 crores for unit 9 as well as about Rs. 30 crores of CAPEX of unit 10. So, this brings the total to about Rs. 112 crores. 
• Additionally company will be consistently deploying CAPEX of about Rs. 100 crores plus year-on-year to generate more products and more facilities. 
• Competition in Ibrufen has been recently intensified in the market which lead to decrease in the prices of the product thereby ultimately hitting the margins of the company.
• Company also saw ofter demand in 3Q and 4Q and it was visible in the top line growth as well. The reason for which can be linked to a media article that talked about in terms of pain management, ibuprofen not being very positive for COVID management. Subsequently the report turned out to be false based on the scientific evidence and this could explain part of the reason why the demand had softened while the demand for other pain management products went up. Although there was no structural shift as the demand in first two quarters was much higher.

• Management on one hand is working on de-risking the company from Ibuprofen but on the other hand also has plans to expand its presence in the regulated markets for Ibuprofen. This strategy can be adopted as explained by the management is  two-pronged approach. Compared with the current capacity of Ibuprofen versus actual production capacity there is an enough of a differential capacity available which company can use to cater enhanced demand from the export market.

Managements Comments

• Management have also stated its intent that in a few years, chemicals should be no more than 40% of total portfolio. 

• There is a lot of pricing pressure on to the formulation companies in the regulated market. Some of that is being pushed back to the company. Company sees minor impact of that on its Ibuprofen business as it is a mix of India and exports. 

• Management is confident that these pricing pressure seems to have bottomed out and therefore going forward, Q2 will be similar to Q1 but Q3 and Q4 will be at a positive improvement both in terms of demand as well as pricing. 

• On backward integration for non-Ibuprofen products like FLU and Metformin and Valsartan as per the management company has made good progress on the technical evaluation side which is complete. The work is in progress is to really figure out what kind of backward integration advantage company really has. 

• Further company is mapping what kind of CAPEX would be required for this complete backward integration. In the next coming few months company will be ready to roll out the entire strategy of the therapeutic categories, the new products that IOL is targeting, what is its backward integration strategy in each of these and what is the CAPEX allocation that company will be doing in each of these buckets. 

• Iol has also been targeting more of exports revenue from developed markets 

• Going forward Company is significantly decreasing its dependance on Ibrufen products thereby increasing non-IBU sales and there certainly has been a better traction for the same. If we compare and see this quarter versus the previous quarter, company has gone from about 45 crores to about 63 crores. On a percentage basis this is a significant jump and it is expected that company will continue to demonstrate this not just on quarter-by-quarter basis, but also on an annual basis. 

• For the upcoming FY top line growth of about a double digit (+10%) is what is expected by the management while in terms of bottom-line growth it is expected to be flat or somewhat lower than what company had last year. Despite the fact company has not quantified the bottom line numbers if we were to take roughly 10% decline in net profits of 361 crores , which comes around 330 crores giving company valuations of 10 PE multiples which is decent as well as way less then its peers which are trading in range of 25-30 pe multiples.

• The reason for this drop in earnings is attributable is because there has been high volatility in the Ibuprofen prices and it being a specialty chemical product is governed, the cost of manufacturing is governed primarily by the cost of aesthetic acid and ethanol which again are highly volatile. The raw material pricing is changing on a weekly basis. Despite this the management has shown confidence that as far as these kinds of products are concerned, company is very competitive as well as confident on delivering performance in line with the market. The exact idea on how the Year pan’s out will only come to know by the end of Q3 FY22.

• Ebita margins for the coming period are expected to be in range of 22% to 25% which is a healthy EBIT number.

Going Forward

• Historically IOL has been an ibuprofen company, which during last couple of years company has diversified into other APIs as well.If we look at what are the other APIs that company has commercialized, it has molecules like Metformin, Clopidogrel, Pantoprazole and now company is going for Valsartan. 

• So company has a couple of other molecules which have been added into the mix. If we look at FY2021, which is the year gone by compared to the previous year, there was a substantial growth in the non ibuprofen business and it expected to continue that trend going forward this year as well. 

• IOL Chemicals and Pharma has successfully completed in this quarter the installation of our its manufacturing facility which is Unit-10 where it manufactures multiple pharma products including Fenofibrate Lamotrigine and UDCA to cater to the growing demand for these products. The installation of the new manufacturing facility Unit-9 to manufacture Gabapentin and other pharma products is slightly  delayed because of the COVID second wave that happened. It is expected to complete this in the third quarter of this year without any cost overruns and all the CAPEX is currently being met through internal accruals. 

• On the CAPEX side company has deployed, Rs. 112 cores In Previous Year and it is expected to l add Rs. 200 crores plus top line to the business. But at a general level, visibility is about 15% growth this year versus last year. 

ACE INVESTOR ASHISH KACHOLIA

Ashish Kacholia is an ace investor. He co-founded Hungama Digital with Rakesh Jhunjhunwala and started his own company Lucky Securities in 2003. His investment strategy includes investing in small and mid-size companies. These are the shares held by Ashish Kacholia as per the information available by the exchanges. For some companies the latest quarter results might not be available as they may file it later on.

Conclusion 

Iol chemicals and Pharmaceuticals is the Largest manufacturer of Ibuprofen with 35% Global share and Only company world wide being backward integrated for Ibuprofen. It is also the Largest producer of Ethyl Acetate at Single Location in India as well as the 2nd Largest producer of Iso Butyl Benzene (IBB) with 30% Global share. Company currently is generating around Rs. 300 crores to Rs. 400 crores cash every year in terms of operations and has around Rs. 350 crores plus cash sitting in the balance sheet. Management plans to use that cash for a combination of both long term and short term initiatives for the company. They have a lot of very exciting future plans for the company in which they will be deploying cash for CAPEX. The margins in recent times have come under pressure due to fierce competition and pricing pressures exerted by those competitors. As a result the bottom line of the company is expected to take a hit in the current financial year and the same is reflected in the price of the stock which is down about 36% from its 52 week high trading at just 6% high from its 52 week low when the broader market is hitting new highs. However management expects this to be a short term blip with everything returning to normalcy from FY 23 and more clarity about the same will be visible only post q3 fy 22. 

Thus Considering the high risk we have written about this company however our views that the company is back on the growth trajectory will be only be conformed post fy 22 q3 results. Given that currently company is trading near to its 52 week high, strong dynamic management, constantly looking for new opportunities, equipped with huge cash & equivalents and Despite taking into view the managements negative bottomline guidance the company still is available at just Pe of 10 on FY 22 earnings estimates which is way less compared to its peers. For more details on valuations please refer management’s comments section.

Additional Properties-: Colour Palette