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- Jesus answered, "The scripture says 'Man shall not live by bread alone, but by every word that proceeds from the mouth of God'."

23 Feb 2020


IOL Chemicals & Pharmaceuticals Ltd
Dated 3 June 19 and Vol.XXVIII No.31

(BSE Code: 524164) (CMP: Rs.213.90) (FV: Rs.10)
We first recommended this stock at Rs.63.8 on 30 October 2017. At that time, the broader markets were in a bear grip and most stocks were available 50-70% below their January 2018 high. IOL Chemicals & Pharmaceuticals has delivered 265% returns in 19 months! We recommend this stock once again based on its excellent Q4FY19 results.

Company Background: Established in 1986, IOL Chemicals & Pharmaceuticals Ltd (IOLCP) is a leading generic pharmaceutical company and a significant player in the Organic Chemicals space. It operates through two segments: Chemicals and Pharmaceuticals.

Chemicals: IOLCP is a major manufacturer in the speciality organic chemical space. It is one of the largest producers of Ethyl Acetate (87,000 TPA) and ISO Butyl Benzene (IBB) in India with over 30% of the global market share and a major player in Ibuprofen. It has forward-integrated this vertical to the pharmaceutical segment with end products such as Ethyl Acetate, IBB, MCA and Acetyl Chloride used as key raw materials for Ibuprofen. It plans to explore its presence in other industries such as paints, flexible packaging and glass. In line with this approach, it has added many MNC giants to its customer base.

Pharmaceuticals: With a presence in 56 countries, IOLCP has established itself as a major player in Ibuprofen with ~30% of the global capacity. It is the world’s only backward-integrated Ibuprofen producer (12,000 TPA) that manufactures all intermediates and key starting materials at one location. It has augmented its pharma business by moving up the value-chain with entry into lifestyle drugs for pain management, anti-depressant, anti-diabetic, anti-platelet and anti-convulsion. IOLCP’s Ibuprofen plant is USFDA and EUGMP certified by the National Institute of Pharmacy and Nutrition, Hungary. It contributes 85% to the total revenue of its Pharma division.

IOLCP is diversifying its API product portfolio. It has commercialized 6 APIs while 10 are in the advanced stage of development. Besides its multipurpose plant, it has a 17 MW power generation plant for captive consumption with adequate backups for trouble-free operations. Its R&D lab is DSIR approved and is fully equipped to validate the existing processes.
Financials: IOLCP has an equity capital of Rs.56.89 crore and reserves of Rs.417.45 crore. The promoters hold 41.89% of the equity capital, which leaves 58.11% stake with the investing public. After increasing their stake by 1.6% in Q4FY19, FIIs now hold   1.76% stake in the company.

Performance Review: For FY19, IOLCP posted 755% higher PAT of Rs.236.7 crore on 68% higher sales of Rs.1685.33 crore and an EPS of Rs.42.11 (cash EPS: Rs.52.77). For Q4FY19, it posted 785% higher PAT of Rs.101.65 crore on 47% higher sales of Rs.422.29 crore and an EPS of Rs.18.08 (cash EPS: Rs.21.39).
With no capacity addition seen globally, Ibuprofen prices have tightened due to the demand-supply mismatch. At the end of FY18, the demand for Ibuprofen was ~35,000 TPA while the global capacity was ~28,000 TPA, of which IOLCP supplied 10,000 TPA. In view of the rising demand, BASF has planned a mega Ibuprofen plant in Germany, which is likely to commence operations in 2022. With the demand-supply situation stabilizing, Ibuprofen prices will also stabilize.

Latest Announcements:
·         IOLCP enhanced its Ibuprofen manufacturing capacity from 10,000 TPA to 12,000 TPA and IBB manufacturing capacity from 9,000 TPA to 12,000 TPA in May 2019 at an aggregate capex of Rs.12.1 crore, which was met through internal accruals.
·         IOLCP has pre-paid Rs.47.62 crore to banks in addition to the regular repayments in order to reduce its debt.
·         The Board allotted 25,00,000 warrants priced at Rs.205/warrant to the promoters on 30 March 2019, with an option to subscribe to equity shares of Rs.10 paid-up at Rs.205/share including a premium of Rs.195/share. It allotted 6,82,000 equity shares to the promoters on exercising the option attached with the warrants.

IOLCP is expanding its API product portfolio and improving cost competitiveness through efficient manufacturing processes and systems and growing relationships with major Indian and foreign generic companies for the sale of APIs. Its APIs are exported worldwide and the key markets include Europe, Latin America, Africa and the Middle East. Ethyl Acetate has varied uses in different industries like pharmaceuticals, flexible packaging and printing ink manufacturing, paints and adhesives, etc. Its key markets in chemicals are African countries, Middle East, SAARC countries and 

Vinati Organics Ltd and IOLCP are the only two major manufacturers of IBB in the world, which is a primary raw material for Ibuprofen. Both the companies have increased the prices of IBB, which could affect the margins of Ibuprofen manufacturers except for IOLCP since it is a backward integrated player. Its Ibuprofen plant runs at 100% capacity utilization and it enjoys higher margins compared to its peers due to the backward integration.

We believe that IOLCP is an opportunity in a decade and certainly, a potential multibagger! Currently, the stock trades at a P/E of just 5.14x. Investors can accumulate the stock with a stop loss of Rs.180 for a price target of Rs.370-450 in the next 18-24 months. The stock’s 52-week high/low is Rs.234.9/ Rs.78.2. Its market cap stands at Rs.1216.8 crore.

Author Pratit Nayan Patel

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