The current section of the “Analysis” series covers NGL Fine Chem Ltd, an Indian manufacturer of active pharmaceutical ingredients (API) primarily for animal drugs.
“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.
To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.
NGL Fine Chem Ltd Research Report by Reader
Dear Dr Vijay Malik,
Good Afternoon.
I am a big fan of your work. Thanks a lot for blogs; it is a gold mine of resources for retail investors. I have begun my investing journey very recently and this is my first in-depth analysis of a company. I would really appreciate your feedback and inputs on my analysis.
Thanks & regards,
Nishant Chiplunkar
Introduction
NGL Fine Chem Ltd is involved in the production of intermediates, APIs and finished dosages, which cater to both the animal and human pharma industries. The company earns about 70% of its revenues from exports. NGL Fine Chem Ltd has three manufacturing facilities, which are located at Tarapur & Navi Mumbai in Maharashtra. The Company has one subsidiary, Macrotech Polychem Private Limited (MPPL), which it acquired in May 2019.
Background check of NGL Fine Chem Ltd:
There has been a case against NGL Fine Chem Ltd, which relates to its transactions with a company, which has been identified as a hawala company.
NGL Fine Chem Ltd had to shut down operations in its Tarapur plants in February 2021 due to certain violations of effluent permissions. This was resolved and the operations restarted in April 2021. This has been a general problem in that area over the past few years.
Related Party Transactions of NGL Fine Chem Ltd
The office space rented by the company belongs to the promoters. There are also several transactions with Nupur Remedies Pvt. Ltd for consultancy services.
Financials
Sales growth over the last 10 years has been 24% while the sales growth for the last 3 years has been 31%. Operating profit margin (OPM) over 10 years has been 21% while the OPM over the last 3 years has been 23%. The debt to equity ratio is 0.11. The interest coverage ratio for FY2021 is 40.
Net fixed asset turnover (NFAT) for FY2021 is 4.5. It was in the range of 2.0 – 2.5 from FY18 – FY20. The inventory turnover ratio (ITR) over the last 10-years has been fluctuating from 5.5 to 9.5. For FY2021, ITR is 6.8. Receivable days have come down from 115 days to 54 days.
Return on equity (ROE) for the last 10 years is 26%. Return on capital employed (ROCE) for the last 10 years is 30%. The self-sustainable growth rate (SSGR) historically has been higher than the sales growth. Cumulative profit after tax (PAT) of 10 years is ₹142 cr while cumulative cash flow from operating activities (CFO) of 10 years is ₹104 cr.
Valuations
The stock is trading at a price to earnings (PE) ratio of 27, which does not provide any margin of safety.
Overall, NGL Fine Chem Ltd seems to have a healthy balance sheet with conservative management. The company has been able to deliver expansion plans in the past.
Regards,
Nishant Chiplunkar
Dr Vijay Malik’s Response
Dear Nishant,
Thanks for sharing the analysis of NGL Fine Chem Ltd with us! We appreciate the time & effort put into the analysis.
While analysing NGL Fine Chem Ltd, an investor would notice that until FY2019, the company used to report only standalone financials. However, in May 2019, the company acquired a 100% stake in Macrotech Polychem Private Limited.
FY2019 annual report, page 38:
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.
Therefore, from FY2020 onwards, it started publishing standalone as well as consolidated financials.
We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of any company, whenever they are present, provide such a picture.
Further advised reading: Standalone vs Consolidated Financials: A Complete Guide
Therefore, in this analysis of NGL Fine Chem Ltd, we have studied standalone financials until FY2019 and consolidated financials from FY2020 onwards.
With this background, let us analyse the financial performance of the company.
Financial and Business Analysis of NGL Fine Chem Ltd:
While analyzing the financials of NGL Fine Chem Ltd, an investor notices that the sales of the company have grown at a pace of 24% year on year from ₹36 cr in FY2012 to ₹258 cr in FY2021. Further, the sales of the company have increased to ₹299 cr in the 12-months ended September 30, 2021, i.e. during Oct. 2020-Sept. 2021.
While analysing the sales growth of the company over the last 10-years, an investor notices that the sales of the company have increased almost every year except FY2020 when the sales declined marginally to ₹152 cr from ₹153 cr in FY2019.
The profit margins of NGL Fine Chem Ltd have seen fluctuations over the years. The operating profit margin (OPM) of the company increased every year from 11% in FY2012 to 26% in FY2017. In FY2018, the OPM declined sharply to 19%. Thereafter, OPM improved to 21% in FY2019, only to again sharply decline to 15% in FY2020. However, in FY2021, the OPM recovered sharply to 28% in the 12-months ended September 30, 2021, i.e. during Oct. 2020-Sept. 2021.
To understand the reasons for such changes in the performance of NGL Fine Chem Ltd, an investor needs to read the publicly available documents of the company like annual reports, credit rating reports, as well as its corporate announcements.
After going through the above-mentioned documents, an investor notices the following key factors, which influence the business of NGL Fine Chem Ltd. An investor needs to keep these factors in her mind while she makes any predictions about the performance of the company.
1) NGL Fine Chem Ltd does not have pricing power over its customers and cannot pass on increases in raw material prices:
While analysing the business of NGL Fine Chem Ltd, an investor notices that the company is not able to pass on the increase in raw material costs to its customers.
The credit rating agency, ICRA, highlighted this aspect in its report for the company in September 2017:
The revision in rating outlook factors in the moderation in performance of NGL in Q1FY2018, primarily in terms of profitability which reported a sharp decline compared to the same period last year (Q1FY2017) as well as sequentially (Q4FY2017), due to inability to adequately pass on the raw material price rise coupled with increase in overheads.
Therefore, an investor would appreciate that the sharp decline in the operating profit margin (OPM) of the company in FY2018 to 19% from 26% in FY2017, was due to its inability to pass on an increase in raw material prices to its customers.
The credit rating agency, ICRA has highlighted the vulnerability of profit margins of NGL Fine Chem Ltd to the raw material prices fluctuations in its report for the company in January 2019.
Vulnerability of profitability to volatility in raw material prices and forex rates: Given the elevated inventory levels, the company’s operating profitability remains exposed to the adverse movements in the raw materials prices that cannot be adequately passed onto the customers.
Moreover, while reading other publicly available documents about NGL Fine Chem Ltd, an investor comes across multiple instances where the company has stated that it cannot pass on the raw material cost increases to its customers.
In June 2021 conference call, on page 21, the management of NGL Fine Chem Ltd highlighted that it cannot pass on the increase in raw material prices even if they have gone up by 50%-60%.
Rahul Nachane: We have seen prices go up quite a few products as the oil prices go up, so there are quite a few chemicals that are dependent upon oil, so those have gone up by a good 50%-60% in the last 1 year.
Ayush Mittal: Do you plan to pass it on like you said with a lag or your pricing is largely stable?
Rahul Nachane: In the short term we cannot pass it on.
In the August 2021 conference call as well, on page 14, the management of NGL Fine Chem Ltd highlighted that the pricing of its final products is inelastic and does not change even if raw material prices go up.
Rahul Nachane: Prices are pretty inelastic so if raw materials prices go up or go down, if it goes up it is difficult to pass on the increase…
When an investor attempts to find out the reasons for the poor pricing power of NGL Fine Chem Ltd and analyses it further, then she comes across multiple factors that lead to the low bargaining power of the company.
Further advised reading: How to do Business Analysis of Pharmaceutical Companies
Let us see try to understand these factors.
2) Business of NGL Fine Chem Ltd is highly competitive with very severe price-based competition:
While analysing NGL Fine Chem Ltd, an investor notices that it faces strong competition in its business. As a result, all the players compete with each other by cutting down prices. Across various communications with the investors, the company has highlighted a few key aspects about the extent of competition in its business, which assume a lot of significance.
In the July 2020 conference call, the management of NGL Fine Chem Ltd highlighted that it is into B2B (business to business sales) where the buyer is very educated and knows what she is buying. The buyer knows to evaluate the quality of its purchase and thereafter prefers to buy from whoever sells the lowest price. The buyer is indifferent to the brand of the seller until the time the product is of acceptable quality and is priced cheap.
July 2020 conference call, page 20:
Rahul Nachane: So see we are selling to, it’s a B2B business… The purchaser is also very educated and very well experienced person. I have not come across any buyer who is willing to give a higher price because of any brand recall of that sort. Only thing what he will do is, all things being the same he will give preference but he will first challenge on the pricing.
The company has also highlighted that the buyers are companies who are interested in getting the best price and do not show preference to the suppliers of any preferred country. Therefore, NGL Fine Chem Ltd faces competition from suppliers across the world.
November 2020 conference call, page 15:
Rahul Nachane: We are in a B2B business. At any point of time, person who offers you more competitive pricing is a preferred supplier. Customers shift to that company, and do not exercise preference in terms of country.
NGL Fine Chem Ltd mentioned to the investors that the competition is so severe that even for the products where it has more than 50% market share, it is not able to dictate prices to the customers. The competitors are always ready to cut prices and take market share away from it.
July 2020 conference call, page 19:
Keshav Garg: Sir but if you are over 50% market share in your top products and the second player is basically 15%-20% market share so basically then the industry that segment is quite consolidated basically so then in that case and sense you are the biggest player so basically are you determining the prices?
Rahul Nachane: No, because others want market share they keep on challenging the price positions.
Even in FY2021, when the company could increase its business significantly due to the fast recovery of its operations after the Covid-lockdown, it had to be very competitive on pricing to its customers.
June 2021 conference call, page 19:
Rahul Nachane: We are offering them a value proposition, we are offering them a good quality, it is not that we are taking a premium for our products. We are being very cost competitive in our approach towards customers.
Therefore, an investor would notice that even in the situations where the company has a dominant market position, there too, it has to be very price-competitive. Otherwise, there is a high probability that it may lose the market share.
Further advised reading: How to do Business Analysis of a Company
3) NGL Fine Chem Ltd does not have long-term contracts with its customers:
While analysing the company, an investor notices that NGL Fine Chem Ltd does not have long-term contracts with most of its customers. The management of the company intimated its investors that except a few customers, most of them do business on a spot orders basis i.e. they place orders when they need the goods.
An investor would appreciate that when a company enters into long-term contracts with its customers then it gets the option of some assurance on pricing for the near future. However, if it gets most of its business in the form of spot orders, then every time it receives an order, then it has to sell the goods at the prevailing market price even if it had purchased its raw material at a higher cost in the past.
The company highlighted this aspect of its business to its shareholders in the July 2020 conference call, where it said that it has to follow the market price, as it is not a monopoly supplier and other competitors are ready to take market share away from it.
July 2020 conference call, page 19:
Rabul Nachane: We don’t have any long term contracts with pricing. There are probably just two or three customers who do price negotiation once a year. Rest of the businesses mainly spot business and prices keep on fluctuating based on what the market is and we don’t have monopoly situation so there are other competitors also. So we have to follow the market.
In June 2021 conference call, on page 18, the company highlighted that, out of more than 400 customers, it is only about 1% of the customers (4-5) have a long-term contract with the company. The remaining 99% of the customers buy the products on a spot basis from the company.
Rahul Nachane: On the sales side, we continue to have just probably a handful of customers, probably 5 or 6 who do long-term supply contracts with us. Most of our sales are on respond basis. So, they are more 3-month sales booking or 4-month sales booking. There are just about 4 or 5 customers who talk about a yearly sales contract.
When an investor attempts to assess if there is any probability of the company entering into long-term contracts in the future, then she gets to know that the focus of NGL Fine Chem Ltd is on the developing countries, which are semi-regulated/less-regulated markets and in these markets, long-term contracts are not available.
The company disclosed this aspect of its business strategy to the investors in its December 2019 conference call, on page 15:
Ankit Gupta: A few years back, we had some 2 long-term contracts with the customers for the supply of our products. Any breakthrough in getting more long-term contracts with customers?
Rahul Nachane: …Therefore, if I were to sell to let’s say Latin America or West Asia or China, there is no long-term contract available. But the growth is happening in these markets now because the European and US markets are more or less maturing and you must be seeing that even in the large-scale companies now their sort of growth is plateauing because they are hardly able to sell more to these markets. So, our focus is completely the rest of the world, not the regulated markets.
The company explained to the investors that it had attempted to enter into the markets of the developed world. However, it found that the cost of meeting the compliances/regulations of these countries was very high. NGL Fine Chem Ltd realized if it had to spend so much money in its operations & processes to comply with the regulations of developed countries, then due to the high cost of operations, it would not be able to compete in other developing countries where it has been selling its goods until now.
Therefore, now, NGL Fine Chem Ltd has decided that it would focus solely on the developing countries, which have fewer regulations where it can sell its products without a lot of investment in operations.
December 2019 conference call, on page 16:
Rahul Nachane: In fact, we went ahead and registered two of our products in Europe for sale over there. This I think 3 years ago. But then we decided overall that it is really not worth the effort because maintaining that sort of a thing would have meant putting a lot of money again into CAPEX and into operational cost. We are back and changed our strategy and now are completely focused on the rest of the world market.
Therefore, an investor would appreciate that the focus of NGL Fine Chem Ltd is on developing countries, which do not have long-term contracts. Therefore, even in the future, the company would get most of its business from spot business contracts.
Recently, in June 2021, while discussing the Q4-FY2021 results with the investors, the management of NGL Fine Chem Ltd stated that going ahead; most of its business will continue to be on a spot basis.
June 2021 conference call, page 18:
Rahul Jain: …do we also see a possibility of some larger long-term contracts coming up for us in the near future?
Rahul Nachane: We do not see that particular part growing up much, no. Our sales will continue to be more on the spot business
As a result, an investor would appreciate that NGL Fine Chem Ltd would not be able to enjoy the price-certainty provided by long-term contracts and it would continue to be exposed to the fluctuations of the market prices.
4) Small business size of NGL Fine Chem Ltd:
An investor would appreciate that the business size of NGL Fine Chem Ltd is not very large. As a result, it is not able to generate necessary resources and create competitive strengths that might have given it a high negotiating power.
The credit rating agency, CRISIL, highlighted the limitations of NGL Fine Chem Ltd due to its moderate size of business in its report for the company in September 2019.
Moderate scale of operations: The moderate scale of operations restricts the ability to negotiate with customers or suppliers vis-a -vis larger players in the sector because of their higher volumes and broader product portfolios. This enables them to invest in better research and development and other infrastructure, thereby fortifying their competitive advantage.
Therefore, an investor would appreciate that due to the small size and resources available with NGL Fine Chem Ltd, it may not be able to benefit from many big business opportunities, where its competitors would gain an upper hand due to their large size and resources.
Advised Reading: Credit Rating Reports: A Complete Guide for Stock Investors
5) Uncertainty about the availability of specialized raw materials of NGL Fine Chem Ltd:
While analysing the business environment of NGL Fine Chem Ltd, an investor notices that at times, the company has faced challenges in getting key raw materials for its products, which affected its business negatively. As a result, the company could not achieve the optimal utilization of its plants and its sales suffered.
For example, in FY2020, when the sales of the company declined over the previous year, FY2019, one of the key reasons was the non-availability of raw material for four products of the company. NGL Fine Chem Ltd highlighted this issue to its investors in a conference call in December 2019 on page 3:
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.
The company highlighted that out of the four products where it was facing a shortage of raw material, for one product, it has not received raw material from February 2019 i.e. for about 10 months.
December 2019 conference call, page 10:
Rahul Nachane: One product has been off since February. Another product we got only probably one-fourth of what we required in July-August-September and also in October-November. In one product, again, from June-July it has come down. So, we are out from 1 product for almost about 8 to 10 months…
The credit rating agency, ICRA, also, in its report in October 2020, highlighted that in FY2020, the sales of the company declined as it could not get its raw material from China.
Its operating income declined marginally to Rs. 151.69 crore from Rs. 153.17 crore in FY2019 on account of loss of sale of certain products due to scarcity of raw material supply from China…
During its communications with the investors, NGL Fine Chem Ltd highlighted to its investors that it is dependent on China for raw materials because these are specialized chemicals where in many cases, China is the only supplier.
July 2020 conference call, pages 13-14:
Paras Adenwala: Do you have any—just to ensure that you don’t suffer once again if there is this kind of a disruption do you have any—alternatives in place?
Rabul Nachane: No. China is the sole supplier for these products.
In addition, for many raw materials, China is the lowest cost supplier in the whole world.
June 2021 conference call, pages 17-18:
Rahul Nachane: The products which we do require some very specific key starting raw materials and close to about 10% of our total materials are imported from China… So, that is how we have mitigated to a certain extent, but not completely been able to mitigate that Chinese reliance because whatever we say they continue to be the lowest cost suppliers for quite a few products.
Moreover, the company also acknowledged that FY2020 is not the only time in history when its business was affected by the raw material shortage. NGL Fine Chem Ltd said that it had faced such a shortage in the years 2010, 2012 and 2016 as well.
December 2019 conference call, page 8:
Umang Shah: The last question from my side would be that have you seen such quarters in the past as well where availability of raw material has been scarce? Have such quarters happened in the past?
Rahul Nachane: It had happened in 2010, 2012, and 2016.
Therefore, an investor would appreciate that NGL Fine Chem Ltd needs a specialized nature of the raw material. For many of its raw materials, China is the only supplier and in addition, China is the lowest cost supplier in the world for these raw materials. Therefore, NGL Fine Chem Ltd keeps on facing severe raw material shortages almost every 2-3 years. In FY2020, the shortage of raw material for one of the products was so much that it could not produce it for at least 10 months.
The company acknowledged that for some of the raw materials, if it is not able to get them from China, then it does not have any solution about getting them from any alternative sources.
December 2019 conference call, page 9:
Rahul Nachane: The import from China, we have now turned to trying to see how we can get products manufactured here in India now, raw materials. And it has been successful in 3 products. Three products will go into production starting January. One product we still don’t have an answer…
An investor would also appreciate that during the times, when NGL Fine Chem Ltd is not able to run its plants optimally, due to the non-availability of raw materials, then its fixed costs and overheads would be shared by a smaller quantity of products. As a result, the fixed cost per unit of the product would increase and it would face a decline in the profit margins.
It happened in FY2020 when the profit margins of NGL Fine Chem Ltd declined sharply to 15% from 21% in FY2019. Non-availability of raw material in FY2020 was one of the key reasons leading to lower profit margins of NGL Fine Chem Ltd.
The credit rating agency, ICRA, in its report of October 2020, highlighted raw material shortage and the increased overheads as the reasons for lower profit margins in FY2020.
it declined to 14.96% in FY2020 from 23.37% in FY2019 due to increased overheads and shortage of raw material, procured from China.
In addition, the company mentioned that out of four products, which faced raw material shortage, two were high margin products. Due to a reduced sale of high margin products, the profit margin was sharply affected in FY2020.
December 2019 conference call, page 12:
Ankit Gupta: Any of those products were relatively higher-margin products or they were in line with the company’s margin of around 20% to 22%?
Rahul Nachane: Two of them were of higher margins.
Therefore, an investor would appreciate that the specialized nature of raw material of NGL Fine Chem Ltd with limited availability puts its business performance at a risk.
From the above discussion, an investor would appreciate that the business model of NGL Fine Chem Ltd is characterised by very tough competition where the players do not have pricing power over the customers. The customers are experienced and knowledgeable corporates who give priority to lower prices and the competitors are always ready to supply them by cutting prices. Therefore, NGL Fine Chem Ltd is in a constant struggle to protect its market share.
The business of the company faces risk from its dependence on spot business contracts as well as its moderate size of operations, which limits the amount of resources that it can put into research and developments and other efficiency improvements. As a result, the comparatively larger competitors of the company are able to benefit from the large-sized business opportunities whereas NGL Fine Chem Ltd has to focus on small-sized opportunities.
Nevertheless, when an investor analyses the profit margins of NGL Fine Chem Ltd over the years, then she notices that the operating profit margin (OPM) of the company has improved significantly over the last 10-years (FY2012-FY2021).
Let us see the reasons for such an improvement in the profit margins of NGL Fine Chem Ltd.
6) Improving profit margins of NGL Fine Chem Ltd:
A reading of the publicly available documents of NGL Fine Chem Ltd brings forward many factors, which have influenced the profit margins of the company significantly. The first factor is the decision of NGL Fine Chem Ltd to enter into high-margin products. The second factor is the dependence of its raw material costs on crude oil prices. Other parameters like the improving operating leverage due to better utilization of its manufacturing capacity have also contributed to increasing OPM of NGL Fine Chem Ltd.
Let us see how these factors have influenced the profit margins of NGL Fine Chem Ltd over the years.
6.1) Manufacture of high-margin products by NGL Fine Chem Ltd:
When an investor analyses the financial performance of NGL Fine Chem Ltd at the start of the last decade from FY2010, then she notices that the operating profit margin (OPM) of the company used to be low during FY2010-FY2011, which increased from about 10% to about 14% by FY2014.
One of the reasons for the sharp increase in the OPM of the company during this period was the decision of NGL Fine Chem Ltd to enter high-margin products.
The credit rating agency, CRISIL, highlighted the entry of NGL Fine Chem Ltd into high-margin products as the reason for the sharp improvement in the profitability in its report in January 2015.
Increase of operating margin over the three years through 2013-14 to 14 per cent has been supported by the launch of new high-margin products.
An investor would also appreciate the dependence of NGL Fine Chem Ltd on high-margin products for its improving OPM from the fact that in FY2020 when the company’s production was affected due to scarcity of raw material for two of its high margin products, then its OPM declined sharply to 15% from 21% in FY2019.
6.2) Dependence of raw material prices of NGL Fine Chem Ltd on crude oil prices:
While analysing the financial performance of the company, an investor notices that the raw material prices of NGL Fine Chem Ltd are dependent on crude oil prices.
In June 2021 conference call, the company highlighted that the cost of many chemicals that it uses is dependent on crude oil prices, which had increased sharply up to 50%-60% in FY2021 when the crude oil prices increased.
Conference call, June 2021, page 21:
Rahul Nachane: We have seen prices go up quite a few products as the oil prices go up, so there are quite a few chemicals that are dependent upon oil, so those have gone up by a good 50%-60% in the last 1 year.
The following chart from Macrotrends shows the history of the crude oil price over the last 10-years. An investor would notice that in FY2021, the crude oil prices have increased sharply from about $20 per barrel to more than $80 per barrel. This is the fact, which is mentioned by NGL Fine Chem Ltd in the conference call highlighting that the prices of many of its raw materials have increased by about 50%-60% due to this sharp increase in crude oil prices.
In the above chart, an investor would notice that during 2014-2016, crude oil prices have declined sharply from about $110 per barrel to $35 per barrel. An investor would appreciate that such a sharp decline in the crude oil prices would lead to a significant reduction in the raw material prices for NGL Fine Chem Ltd, which, in turn, should lead to an improvement in the profit margins.
When an investor observes the operating profit margin (OPM) of NGL Fine Chem Ltd during this period, then she notices that the OPM had increased sharply from about 14% in FY2014 to about 26% in FY2017.
Advised reading: How to Analyse New Companies in Unknown Industries?
6.3) Increasing utilization of manufacturing capacity by NGL Fine Chem Ltd i.e. improving operating leverage:
An investor would appreciate that whenever any company achieves a high utilization level of its manufacturing capacity, then its fixed costs i.e. overheads are distributed over a bigger quantity of products. As a result, the profit margins of the company increase.
For example in FY2015, when NGL Fine Chem Ltd reached high capacity utilization for its plants, then it reported high-profit margins.
The credit rating report in January 2015 by CRISIL:
NFC’s operational performance… was supported by diverse product portfolio and customer base helping the company maintain the average capacity utilization of plant high.
The company elaborated to its investors that whenever it comes up with a new manufacturing capacity, then for some time, it has to produce sample products (validation batches), which are sent to the regulators and the customers. Only once the samples are approved by the regulators and the customers, then the commercial production starts. This process takes time ranging from a few months to years.
December 2019 conference call, page 2:
In the pharma industry, whenever there is production from a new facility, we have to undertake validation batches and subject them to stability studies prior to selling the produce into the market.
During this period, the company has to run the plant for all three shifts and accordingly has to employ people for the full production process.
December 2019 conference call, page 3:
Rahul Nachane: there has been an increase in the total number of people which we have employed because when the plant goes into validation, we need to staff it on all 3 shift basis. We can’t do it partially. And at the same time, while the salaries have started hitting the revenues, there is no incremental revenue coming in right now.
The same holds good for electricity and fuel expenses. The fixed costs have gone up while proportionately the revenues have not started flowing in.
An investor would appreciate that such an increase in costs at the start of a plant while there is no sale of products from it, leads to higher costs with no incremental revenue. It leads to a decline in the profitability of the company.
The credit rating agency, ICRA, also highlighted it as a reason for the decline in the profitability of the company in its report in October 2020.
While, NGL incurred overheads on the validation process of four new products to be manufactured in the new unit, revenue inflow from the unit did not commence during the year.
However, when the commercial production from the plant starts and the capacity utilization improves, then fixed costs are spread over a larger quantity of the products and as a result, the profit margins improve. The company highlighted that such an improvement in capacity utilization can easily improve the profit margins by 20%-30%.
June 2021 conference call, page 14:
Rahul Nachane: See, it takes time for the capacity to kick-in when we make a CAPEX, for the entire capacity to get used it takes a little while. So, something similar happened in FY20 where the capacity was commissioned but we were doing the validation matches and the trials for different products. The benefits of that came on to us in 2021. So, going forward we can see probably a couple of maybe an anomaly here or there where there is a larger capacity which we have created but in the capacity utilization and that that too might be only something like 20% or 30% for that particular year. In which case we see a higher fixed asset cost which will depress our margins. But again, in the following years as the utilization goes up, it will again get better results.
Therefore, whenever, NGL Fine Chem Ltd witnesses a higher capacity utilization, then its profit margins improve. In recent times, the company is operating its plants at a capacity utilization of about 95%, which is good.
August 2021 conference call, page 2:
Rahul Nachane: All our facilities are currently running at about 95% which is near to full capacity utilization.
The company acknowledged that the improving operating leverage has helped it achieve high-profit margins.
Q4-FY2021 results presentation, June 2021, page 8:
Improvement in EBITDA Margins driven by significant operating leverage…
Therefore, an investor would appreciate that near-full capacity utilization is one of the reasons for a sharp increase in the profit margins of NGL Fine Chem Ltd to 31% in FY2021 and 28% in the last 12 months ending September 30, 2021, i.e. during Oct. 2020-Sept. 2021.
6.4) One-time benefits from Coronavirus (Covid) pandemic:
While reading the various disclosures made by NGL Fine Chem Ltd, an investor would notice that there have been many one-time factors, which have contributed to the high-profit margins achieved by the company in the recent times characterised by Coronavirus (Covid) pandemic.
November 2020 conference call, page 8:
Rahul Nachane: We have also had postponement of lot of expenses especially plant maintenance upkeep, sales and marketing because there is no travel going on right now. We are not participating in any international exhibitions because there are none taking place right now. Lot of other smaller expenses have got postponed. So these will come back, and it is quite possible that the profitability in terms of margins will decrease.
Therefore, an investor would appreciate that the recent sharp increase in the profit margins of the company is also contributed by the deferment of many expenses that will come back in the future. Therefore, an investor should keep it in her mind while she projects current high-profit margins of about 30%, into the future.
This is especially true when an investor notices in the past; there have been periods where the company witnessed its sales increase whereas the profits of the company declined. For example, during FY2010 to FY2012, the sales of the company increased from ₹27.8 cr in FY2010 to ₹36.1 cr in FY 2012. However, during this period, the net profit after tax of the company declined from ₹2.7 cr in FY2010 to ₹1.5 cr in FY2012. It indicates that the net profit margin (NPM) of the company declined from about 10% in FY2010 to about 4% in FY2012, a decline of about 60% in two years.
An investor would note that the business of NGL Fine Chem Ltd is characterised by intense competition, undercutting prices, powerful knowledgeable buyers, short-term/spot business contracts, and dependence on specialized raw material suppliers. The company does not have pricing power over the customers. As a result, even if the company has witnessed an increase in the profit margins over the years, nevertheless, an investor should be cautious while she projects the business performance in the future.
While analysing the tax payout ratio of NGL Fine Chem Ltd., an investor notices that for most of the years, the tax payout ratio of the company has been in line with the standard corporate tax rate prevalent in India.
In recent years, the tax payout ratio has declined to below 30% from the previous years’ level of above 30%, which seems to be in line with the recent changes in the corporate tax rates implemented by India.
FY2021 annual report, page 127:
The tax rate used for the reconciliations above is the corporate tax rate of 25.17% payable by corporate entities in India on taxable profits under tax law in the Indian jurisdiction
Further advised reading: How to do Financial Analysis of a Company
Operating Efficiency Analysis of NGL Fine Chem Ltd:
a) Net fixed asset turnover (NFAT) of NGL Fine Chem Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of NGL Fine Chem Ltd in the past years (FY2013-21), then she notices that the NFAT of the company has stayed in the range of 4.0.
The NFAT of the company had declined during FY2017-FY2020 when the NFAT decreased from 4.6 in FY2016 to 2.4 in FY2020.
An investor would note that during FY2016, the company had started work on a major capacity expansion project.
FY2016 annual report, page 7:
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 first quarter of 2017-18. The total project expenditure is to the tune of Rs. 25 crores.
The trial runs of the expansion project started in FY2018.
FY2018 annual report, page 6:
The company’s expansion project in Tarapur has been completed and trial runs have been undertaken successfully.
From the above discussion on the profit margins of NGL Fine Chem Ltd, an investor would recollect that upon completion of a project, the company has to produce sample products for validation by the regulators and customers. During this period, the company has to employ staff for all the three shifts, spend money on electricity, fuel etc. However, the sales from the new plants do not start until the validation process is complete.
Therefore, during the period of construction of the plant, its validation and the ramp-up of the capacity utilization to the optimal levels, the company has to spend money on the plant without proportionate addition to revenue from the plant. As a result, during this period, the NFAT of the company declines.
An investor would appreciate that once the products from the plant are validated by the regulators and the customers, then it starts contributing to the revenue and the NFAT of the company would increase.
NGL Fine Chem Ltd had gone through the same stages during FY2016 to FY2021 during its capacity expansion project at Tarapur. Once its plant started operating at optimal capacity utilization in FY2021, then its NFAT increased significantly to 3.9 in FY2021 from 2.4 in FY2020.
August 2021 conference call, page 2:
Rahul Nachane: All our facilities are currently running at about 95%, which is near to full capacity utilization.
Going ahead, an investor should keep a close watch on the capacity utilization levels of NGL Fine Chem Ltd so that she can assess whether the company is utilizing its assets efficiently or not.
Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors
b) Inventory turnover ratio of NGL Fine Chem Ltd:
While analysing the efficiency of inventory utilization by NGL Fine Chem Ltd, an investor notices that over the last 10 years (FY2013-FY2021), the inventory turnover ratio (ITR) of the company has stayed in the range of 7 to 9.
The ITR of the company declined to 6.5 in FY2020. As per the company, this decline was related to the inventory, which the company had to create for the validation process of the new plant.
December 2019 conference call, page 6:
Yogansh Jeswani: Sir, one question on the inventory side. In September balance sheet, we see the inventory a bit on the higher side. Is there any specific issue on that?
Rahul Nachane: Yeah, because 4 products are into validation. So, all the inventory is slow moving for those.
In addition, the deferment of orders in March 2020 due to Coronavirus pandemic related lockdown, also led to an increase in inventory and thereby a decline in the ITR for FY2020.
Ankit Gupta: Our inventories have also gone up compared to last year by almost 10 crores as on March 31, 2020…
Rabul Nachane: No, mainly it has been semi-finished goods. There is long order which we were executing in the current quarter for which we 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.
Once the business restarted after easing of lockdown, the inventory utilization of the company improved and the ITR of the company improved from 6.5 in FY2020 to 7.8 in FY2021.
Nevertheless, the company has to maintain a large amount of inventory with us, which is in the form of work-in-progress (WIP). This is because, some of the production processes of the company take a long time, up to 8 weeks, to be complete.
Credit rating report by ICRA in January 2019:
The company’s inventory levels generally remain on a higher side (76 days as on March 31, 2018), owing to a sizeable WIP inventory (given that the production cycle varies from a few days for basic products up to eight weeks).
In addition, when an investor attempts to understand the value proposition offered by NGL Fine Chem Ltd to its customers, then she notices that the company attempts to focus on three things: low prices, best quality and reliability.
December 2019 conference call, pages 7-8:
Rahul Nachane: We have our entire marketing strategy over 3 core ideas which we hold. The first is that we believe that we should give the best possible pricing to the customer… The second foundation stone is that we should deliver the best quality possible to the customer… And the third part is reliability that given a commitment to a customer, we have to stick to it no matter what happens.
An investor would appreciate that if a company wishes to be reliable in meeting its delivery commitments to its customers, then it has to maintain a higher amount of inventory with itself so that it can deal with various operational and production planning risks.
The credit rating agency, CRISIL, highlighted in its report for the company in September 2017 that NGL Fine Chem Ltd has to maintain a high inventory to remain competitive.
It has to maintain raw material inventory of 30-60 days to cater to urgent demand and remain competitive.
Therefore, it seems that due to the long production process and the aim of being a reliable supplier to the customers, NGL Fine Chem Ltd ends up maintaining a high inventory with itself, which makes its operations working capital intensive.
Going ahead, an investor should monitor the inventory turnover ratio of NGL Fine Chem Ltd so that she can assess whether the company is utilizing its inventory efficiently or not.
Further advised reading: Inventory Turnover Ratio: A Complete Guide
c) Analysis of receivables days of NGL Fine Chem Ltd:
While analysing the receivables days of NGL Fine Chem Ltd, an investor would notice that the company used to have receivables days of 90 days or more until FY2018. While reading the credit rating reports for NGL Fine Chem Ltd, an investor notices that the credit rating agency, CRISIL, mentioned in its report of September 2017 that the company has to give a credit period of about 90-120 days to its customers.
Also, operations are moderately working capital intensive. The company extends credit of 90-120 days to its clients.
An investor would appreciate that in a competitive industry where many suppliers are ready to eat into each other’s market share by offering lower pricing to the customers, a company has to offer generous payment terms to the customers.
Nevertheless, from FY2019 onwards, the receivables days of the company have improved significantly. The receivables days of NGL Fine Chem Ltd declined from 115 days in FY2017 to 45 days in FY2021.
The company intimated to its investors that it has improved the monitoring of its receivables collection as well as reduced the credit period that it offers to its customers, which has led to an improvement in the receivables position.
FY2021 annual report, page 78:
Better collection monitoring and tighter credit limits implementation has resulted in better efficiency.
The recent improvement in the collection efficiency seems to be a result of the faster recovery of its operations by the company after Covid-related lockdown. The company mentioned to its investors that it could restart its operations faster when compared to its competitors. As a result, it could gain market share.
November 2020 conference call, page 4:
Rahul Nachane: We have been able to take part of the market share from some of our other competitors because we were able to come back to normalcy probably a little faster than them. And customers saw that flow of material started with us.
Therefore, even though, the company has shown an improvement in its receivables position, an investor needs to understand that API manufacturing is an intensely competitive industry. In such an industry, tightening of payment terms can lead to a loss of business opportunities as the competitors catch up.
An investor needs to understand that the industry of API manufacturing is highly competitive. In any competitive industry, the manufacturers have to give good payment terms to the customers and maintain a high inventory to remain competitive.
The credit rating agency, ICRA has highlighted in its report in January 2019 that the business of the company is working capital intensive.
the ratings remain constrained by the company’s high working capital intensity of operations due to high inventory and receivable levels,
Further advised reading: Receivable Days: A Complete Guide
When an investor realizes the working-capital-intensive nature of its operations when she compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of NGL Fine Chem Ltd for FY2012-21. She notices that over the last 10-years (FY2012-FY2021), the company has not been able to convert its profit into cash flow from operations.
Over FY2012-21, NGL Fine Chem Ltd reported a total net profit after tax (cPAT) of ₹141 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹106 cr.
It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.
Further advised reading: Understanding Cash Flow from Operations (CFO)
The Margin of Safety in the Business of NGL Fine Chem Ltd:
a) Self-Sustainable Growth Rate (SSGR):
Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company
Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.
Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.
An investor may calculate the SSGR using the following formula:
SSGR = NFAT * NPM * (1-DPR) – Dep
Where,
- SSGR = Self Sustainable Growth Rate in %
- Dep = Depreciation rate as a % of net fixed assets
- NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
- NPM = Net profit margin as % of sales
- DPR = Dividend paid as % of net profit after tax
(For systematic algebraic calculation of SSGR formula: Click Here)
While analysing the SSGR of NGL Fine Chem Ltd, an investor would notice that over the years, the company had an SSGR of 25%-30%. Over the same period, the company has grown its sales at a CAGR of about 24%.
As the company has grown its sales within its SSGR; therefore, despite growing its sales from ₹36 cr in FY2012 to ₹258 cr in FY2021, the company has been able to keep its debt levels under check and without raising money from equity. In FY2021, the company is net-debt free as it has reported a debt of ₹16 cr whereas it has cash & investments of ₹34 cr.
An investor arrives at a similar conclusion when she analyses the free cash flow (FCF) position of NGL Fine Chem Ltd.
b) Free Cash Flow (FCF) Analysis of NGL Fine Chem Ltd:
While looking at the cash flow performance of NGL Fine Chem Ltd, an investor notices that during FY2012-2021, it generated cash flow from operations of ₹106 cr. During the same period, it did a capital expenditure of about ₹102 cr.
Therefore, during this period (FY2012-2021), NGL Fine Chem Ltd had a free cash flow (FCF) of ₹4 cr (=106 – 102).
In addition, during this period, the company had a non-operating income of ₹19 cr and an interest expense of ₹17 cr. As a result, the company had a total free cash flow of ₹6 cr (= 4 + 19 – 17). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.
While looking at the overall cash-flow position of NGL Fine Chem Ltd over the last 10 years (FY2012-2021), an investor notices that the company has been able to pay dividends of about ₹3 cr to its shareholders from its free cash flow.
Going ahead, an investor should keep a close watch on the free cash flow generation by NGL Fine Chem Ltd to understand whether the company continues to generate surplus cash from its operations.
Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF
Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.
Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing
Additional aspects of NGL Fine Chem Ltd:
On analysing NGL Fine Chem Ltd and after reading annual reports, DRHP, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.
1) Management Succession of NGL Fine Chem Ltd:
NGL Fine Chem Ltd is promoted by Mr Rahul Nachane (age 57 years, FY2020 annual report, page 31) and Mr Rajesh Lawande (age 45 years, FY2014 annual report, page 11). Mr Rahul Nachane is working in the company as the managing director and chief executive officer (MD & CEO) whereas Mr Rajesh Lawande is acting as the whole-time director and chief financial officer (WTD & CFO).
In June 2021, Mr Ahaan Nachane, son of Mr Rahul Nachane has joined the company as a vice president of the company.
FY2021 annual report, page 24:
to appoint Mr. Ahaan Nachane, son of Mr. Rahul Nachane, Managing Director and CEO and Mrs. Ajita Nachane, Non-Executive Director as Vice President w.e.f. 01st June, 2021
The presence of younger family members at executive positions within the group, while the senior members are still handling responsibilities, looks like a good succession plan. This is because the young members can learn about the fine nuances of the business under the guidance of senior members until the seniors decide to take retirement.
Going ahead, an investor may keep a close watch on the relationships among the promoter families, the Nachane family and the Lawande family, to understand whether any ownership issues arise between them. An investor may contact the company directly for any clarifications in this regard.
Further advised reading: How to do Management Analysis of Companies?
2) Strange calculation of cash flows statement by NGL Fine Chem Ltd:
While analysing the financial statements of NGL Fine Chem Ltd, an investor comes across some transactions in its cash flow statement, which seem in contrast to the expected calculation of cash flows. Such transactions are noted in both the cash flow from investing activities (CFI) as well as in cash flow from operating activities (CFO).
2.1) Calculation of cash flow from investing activities (CFI) by NGL Fine Chem Ltd:
While assessing the cash flow statements of the company in its annual reports, an investor notices that the company has included the inflows & outflows due to borrowings (both long-term borrowings as well as short-term borrowings) and finance costs in the cash flow from investing activities (CFI).
An investor would appreciate that the borrowings and finance costs are usually a part of the cash flow from financing activities (CFF).
For example, the calculation of cash flow from investing activities in the FY2021 annual report, on page 139, includes finance cost as well as the long-term borrowings and short-term borrowings for FY2021 as well as FY2020.
When an investor notices the calculation of cash flow for financing activities in the FY2021 annual report, then she notices that the company has shown only dividend payments as an outflow in both FY2021 and FY2020.
FY2021 annual report, page 140:
When an investor attempts to find out for how long, the company has been showing its financing cash flows (i.e. borrowings and finance costs) under investing activities, then she notices that until the FY2017 annual report, it used to properly show borrowings and finance cost under the cash flow from financing activities (CFF).
FY2017 annual report, page 38:
From the FY2018 annual report onwards, NGL Fine Chem Ltd started including borrowings and finance costs under cash flow from investing activities (CFI) instead of cash flow from financing activities (CFF)
An investor would appreciate that presenting cash flows arising out of borrowings or finance costs under investing activities may give an erroneous picture to any investor who relies on the cash flow from investing activities to understand how much money is put by the company in capex or financial investments. If the investor only relies on the data presented by the financial databases without reading the annual reports, then she may unknowingly make an error in her analysis of the cash flow statement of the company.
The annual report of the company is silent on the assumptions/logic used by the company for classifying the borrowings and finance cost under cash flow from investing activities. An investor is not able to find any explanation by the company under its significant accounting policies.
Moreover, when the investor attempts to find any explanation by the company in the FY2018 annual report when the company adopted the new Indian Accounting Standards (IndAS), even then she is not able to find any explanation for such a change in the treatment of borrowings and finance costs in the cash flow statement.
An investor may contact the company or the statutory auditor of the company for understanding their reasons for such a change in the treatment of borrowings and finance costs in the cash flow statement. She may ask them the reasons why they believe that it is better to show borrowings and finance costs under cash flow from investing activities (CFI) instead of cash flow from financing activities (CFF).
2.2) Calculation of cash flow from operating activities (CFO) by NGL Fine Chem Ltd:
When an investor analyses the cash flow from operating activities (CFO) presented by the company in its annual reports, then she notices that NGL Fine Chem Ltd has included the cash flow changes due to financial assets like investments like shares and mutual funds etc. into its CFO.
An investor would appreciate that usually for manufacturing organizations, the cash flow changes due to investments like shares and mutual funds are shown under cash flow from investing activities (CFI). This is because investments in the shares and mutual funds is not their operating activity.
If a manufacturing company includes such changes in the CFO, then the company may sell its investments like mutual funds and then show the cash inflow under CFO. This will inflate the CFO and show an erroneous picture to the investors.
The reverse may happen when the company shows an outflow due to investments into mutual funds under CFO. This would reduce the CFO and once again, would present an erroneous picture to the investors.
For example, an investor may look at the cash flow from operating activities (CFO) calculation provided by the company in its FY2021 annual report, on page 139 in which the company has included an outflow of ₹19.42 cr on account of “other current financial assets”.
When an investor reads the balance sheet in the FY2021 annual report to understand the details of “other current financial assets”, then at page 136, she notices that this change of about ₹19 cr relates to the Current assets >> Financial assets >> Investments, which have increased from about ₹10 cr in FY2020 to ₹29 cr in FY2021.
The company has provided details of these Current assets >> Financial assets >> Investments in note 8 in the detailed schedules to the financial statements on pages 154-155 of the FY2021 annual report. An investor notices that these assets include 1,168 shares of Tata Consultancy Services Limited (TCS) and various mutual funds.
Therefore, from the above discussion, an investor would appreciate that in the cash flow statement for FY2021, NGL Fine Chem Ltd has included changes in the investments like shares and mutual funds under CFO, which usually should be included under cash flow from investing activities (CFI).
Including changes in current financial investments like shares and mutual funds under CFO may lead an investor to make an erroneous decision if she does not see the CFO calculation in detail. If she relies only on the data of the CFO provided by the financial databases and does not go through the annual report, then she may make an error in her assessment of the company’s cash flow generation.
This is because, if during any year, a company has sold its financial investments, then this cash inflow will inflate the CFO. On the contrary, if the company has purchased financial investments, then this cash outflow would deflate the CFO for the year. Both these cases would lead to an error in the analysis by the investor.
An investor notices that NGL Fine Chem Ltd started showing current investments under CFO from FY2014 onwards. Thereafter, every year, it has shown these in the CFO calculations as “current investments” up to FY2017 annual reports and as “other current financial assets” from FY2018 annual report onwards.
An investor may contact the company or the statutory auditor of the company for understanding their reasons for including cash flow changes due to investments in shares and mutual funds under CFO instead of cash flow from investing activities. She may ask them the reasons why they believe that it is better to show shares and mutual fund transactions under the CFO instead of cash flow from investing activities (CFI).
Whenever an investor comes across such instances where certain items in the financial statements are classified by the company in a different manner than what is the usual practice, then she may make changes to the reported financials on her own and then arrive at the conclusions about the financial position of the company.
In the case of NGL Fine Chem Ltd, it is advised that an investor may edit the cash flow from operating activities, as well as the cash flow from investing activities to arrive at the correct cash flow assessment of the company.
Advised reading: How Companies Manipulate Cash Flow from Operating Activities (CFO)
3) Project execution by NGL Fine Chem Ltd
While reading the available annual reports of the company from FY2010, an investor notices that during this period, the company has completed a few capacity expansion projects. These projects provide an investor with the opportunity to assess the ability of the company to complete projects within time and cost estimates.
3.1) Capacity expansion project at Tarapur:
In the FY2016 annual report, NGL Fine Chem Ltd intimated to its shareholders that it has started work on a capacity expansion plant in Tarapur, which it expects to complete by Q1-FY2018 (i.e. April-June 2017) for ₹25 cr.
FY2016 annual report, page 7:
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 first quarter of 2017-18. The total project expenditure is to the tune of Rs. 25 crores.
However, the project started witnessing delays both in the terms of time as well as cost. In the next year’s annual report (FY2017), the company disclosed that, now, the project would cost ₹30 cr and would be completed in Q3-FY2018 (i.e. Oct.-Nov. 2017).
FY2017 annual report, page
The plant is expected to be operational by Q3 2017-18. The total project expenditure is to the tune of Rs. 30 crores.
Upon reading future annual reports, an investor notices that the company faced further challenges while completing this project. In June 2018, the project had a fire incident in which there was a substantial loss of assets.
Credit rating report by CRISIL, July 2018:
On June 27, 2018, NGL Fine Chem Limited (NGL) announced that there was fire accident at the company’s plant located at F-11, Tarapur and that the assessment of damage is under process. At the aforesaid plant, NGL was carrying out expansion of their production capacity and was undertaking trial production when accident happened.
In the FY2019 annual report, the auditor of the company highlighted that due to the fire, there was a substantial loss of assets.
FY2019 annual report, page 76:
Loss by fire: In June 2018, there was fire in the Company’s new Plant at Tarapur, thereby resulting in substantial loss of machinery and equipment.
The plant was finally completed by the company in February 2019 with a delay of about two years from the earlier expected completion date of Q1-FY2018.
December 2019 conference call, page 2:
The brownfield expansion at Tarapur, which was commissioned in February 2019, is now in operation.
Therefore, an investor would appreciate that the capacity expansion plant in Tarapur was completed by the company with a substantial delay of about 2 years. The investor would appreciate that whenever there is a delay in the completion of any project, then in most instances, it also leads to cost overruns.
As disclosed by the company in the FY2017 annual report, the cost of the project had increased from ₹25 cr to ₹30 cr when it projected a delay of 6 months in completion. However, as the project witnessed a delay of more than 20-months; therefore, the cost overrun would be even higher.
In addition, the investor would note that the company witnessed losses due to the fire incident at the project site as well. An investor may think that the fire incident may be an unintentional error and the insurance company may reimburse the losses. However, it turned out that the insurance company refused to pay the claim of ₹4.55 cr put by the company for the losses due to the fire incident. An investor may appreciate that it might be a case where the fire would have started due to negligence by the company.
FY2021 annual report, page 177:
Subsequent to the fire loss in June 2018, the company had lodged a fire claim with insurance company. The said claim has not been received till date and is being disputed by the insurance company. Consequently, adopting a conservative view, the amount receivable has been fully provided during FY 2020-2021 by charging a sum of ₹ 455 Lakhs to the profit and loss account.
An investor may contact the company directly to get more clarity about the reasons for the start of the fire and the reasons cited by the insurance company while refusing to pay the claim amount.
Moreover, when an investor reads the history of the company, then she notices that it was not a single incident of fire in the company’s plants. Previously, in 2009 as well, the company had suffered losses due to fire at the company’s plants.
FY2010 annual report, page 2:
In June 2009, there was a fire at one of the company’s factories situated at Navi Mumbai. There was substantial loss suffered in terms of damage to assets and stocks.
From the above discussion, an investor may note that the project execution and operations by the company may leave scope for improvement in the terms of construction of the plant as well as running the plants safely.
3.2) Capacity expansion project at Navi Mumbai:
In FY2010, NGL Fine Chem Ltd started work on a capacity expansion plant in Navi Mumbai, which it had expected to complete by April 2011.
FY2010 annual report, page 2:
The company has undertaken major expansion and reconstruction at two of its sites at Navi Mumbai & Tarapur. One of these plants is expected to commence production in August 2010 and the other is expected to commence production in April 2011
However, it seems that the company could not complete this project in April 2011 because after two years, in the FY2012 annual report, the company stated that it plans to complete the Navi Mumbai project in Q1 of the ongoing year (i.e. Q1-FY2013 = April – June 2012).
FY2012 annual report, page 1:
The company plans to commission its plant at Navi Mumbai at Unit NGL during Q1 of the year.
From the above discussion, an investor would appreciate that NGL Fine Chem Ltd promised to complete the Navi Mumbai plant in Q1-FY2012; however, it could complete it only with a delay of about one year in Q1-FY2013.
Therefore, it seems that NGL Fine Chem Ltd can improve its project execution further, which can save the investors time and cost overruns. Going ahead, an investor should keep a close watch on the progress of the company’s capacity expansion plans so that she can monitor whether NGL Fine Chem Ltd can complete its projects within the estimated time and cost.
Advised Reading: Understanding the Annual Report of a Company
4) Pollution control issues at the plants of NGL Fine Chem Ltd:
While reading about NGL Fine Chem Ltd, an investor comes across multiple instances where the company had to stop operations at its plants due to notices from the govt. authorities.
In February 2020, the company had to shut operations at its plant for a few weeks.
July 2020 conference call, page 4:
Dhvwanil Desai: The question is that I think there is some closure order issued by MPCB few months ago, so any update on that, has the issue been resolved and are we back with our operations on that side?
Rabul Nachane: That closure was in February and it was lifted within about I think just about two to three weeks time.
After one year, in February 2021, the company had to shut operations in its Tarapur plant due to causing excessive water pollution and air pollution.
The credit rating report by ICRA in February 2021:
On February 12, 2021, NGL Fine-Chem Limited (NGL) announced that one of its unit in Tarapur (Maharashtra) has received a notice from the Maharashtra Pollution Control Board (MPCB) directing the closure of operations at the factory premises. The notice mentions regarding the violation of the provisions of Water (Prevention and Control of Pollution) Act, 1974, Air (Prevention and Control Pollution), Act, 1981
In the very next month, in March 2021, NGL Fine Chem Ltd had to shut down operations of another plant in Tarapur operated by its subsidiary for excessive water and air pollution.
The credit rating report by ICRA in March 2021:
On March 6, 2021 NGL Fine-Chem Limited (NGL) had announced that Maharashtra Pollution Control Board (MPCB) has issued a notice directing the closure of operations of its subsidiary: Macrotech Polychem Private Limited (MPPL) in Tarapur (Maharashtra) for alleged violation of the provisions of the Water (Prevention and Control of Pollution) Act, 1974 Air (Prevention and Control Pollution), Act, 1981
Moreover, an investor is surprised to see that the company was able to meet the pollution control norms for the plant of its subsidiary, Macrotech Polychem Private Limited (MPPL), which it had completed only recently in October 2019.
Conference call, December 2019, page 2:
With regard to Macrotech, which was acquired by us in May this year, we have commissioned this plant in October 2019.
An investor may appreciate that the closure of the plant that the company had commissioned in October 2019 may indicate that the company did not spend sufficient money to meet the pollution control guidelines. Now, after getting the closure notice from the govt., the company is putting up an effluent treatment plant at the MPPL site.
Conference call, June 2021, page 16:
Rahul Nachane: At the other plant in Tarapur where we have our subsidiary in Macrotech, as part of the investment, which we are doing, we are also putting in a zero liquid discharge effluent treatment plant over there.
In light of these multiple instances of loss of business of the company due to poor pollution control measures at its plants, the concerned shareholders asked the management during the conference calls for the steps undertaken by it and whether these issues are now resolved.
In August 2021, the company told the shareholders that the issues are not yet resolved and the problems persist. The company mentioned that even after its efforts by December 2021, still, about 25% of the production of the company would be from plants, which are not zero-liquid-discharge.
Conference call, August 2021, page 15:
Rahul Nachane: No, it is not all over. As far as we are concerned there will be two of our units, which we will not be able to convert to zero liquid discharge… Let us say by December 2021 about 75% of our production will come from sites, which are zero liquid discharge, and with very low amount of threat. 25% of our production will still come from sites, which are not zero liquid discharge.
Upon further analysis, an investor gets to know that at two of its manufacturing sites, the company does not have any space for effluent treatment plants, which may indicate a suboptimal design while creating the manufacturing units. Therefore, to overcome the challenge, NGL Fine Chem Ltd plans to transport the polluted water, in trucks, from these plants to the proposed effluent treatment plant of its subsidiary.
Conference call, June 2021, page 17:
Rahul Nachane: At the other two plants in Tarapur they are pretty small in nature, and we really do not have the space for putting in any effluent treatment plant over there. So, once the Macrotech plant is commissioned we plan to approach the authorities and ask them to allow us to truck effluent from these plants to Macrotech…
From the above discussion, an investor would notice that the approach of the company in dealing with the pollution control measures leaves scope for improvement. It did not create a proper effluent management system even in the plant completed as recently as October 2019. As a result, it had to shut down operations in a supposedly modern plant as well.
Now, the company has disclosed to the investors that its pollution control measures would cost about ₹10 cr. It might be a case where the company attempted to save on the money by ignoring setting up proper pollution control infrastructure at its plants. However, it paid the price when it had to shut down its plants due to pollution issues.
Conference call, August 2021, page 8:
Rahul Nachane: At Macrotech and one of our sites in Tarapur where we are upgrading zero liquid discharge total capex is close to about 10 Crores.
Moreover, despite the best measures taken by the company, still, it would end up making 25% of production in the plants that do not meet the pollution control criteria. Because of the improper planning for handling water pollution, now, it has to think of solutions like transporting polluted water from one plant to another in trucks, for treatment.
Going ahead, an investor should keep a close watch on the progress of the pollution control measures being undertaken by the company in its plants. This is because, nowadays, the regulators are taken a very strict approach while dealing with polluting plants.
An investor would remember that the copper smelting plant of Vedanta group at Tuticorin (Thoothukudi), which was the largest copper unit in India, was shut by the govt. in 2018 as it was causing a lot of pollution.
The Vedanta group has not been able to get permission to run the plant despite its best efforts for more than the last 3 years and it is incurring losses of multiple crores of rupees every year due to the plant closure.
Because of the increasing awareness of the environmental pollution caused by industries, it is advised that an investor should keep a close watch on the pollution control measures implemented by NGL Fine Chem Ltd.
5) Promoters’ remuneration of NGL Fine Chem Ltd:
While analysing the salary/remuneration taken by the promoters of the company, an investor comes across certain instances when the promoters took an increase in the salary while the profits of the company had declined.
For instance, in FY2018, the net profit after tax (PAT) of NGL Fine Chem Ltd declined to ₹12.6 cr from ₹14.9 cr in FY2017, a decrease of 15.5%. However, during FY2018, the promoters, Mr Rahul Nachane and Rajesh Lawande took home a salary of ₹2.60 cr, which was an increase of about 80% over the salary of ₹1.46 cr taken by them in FY2017.
Therefore, FY2018 represents an instance where the promoters of the company increased their salary significantly when the profits of the company had declined. However, this was not the first instance when the promoters of the company increased their salary while the profits of the company had decreased.
Previously, in FY2011, the profit after tax of NGL Fine Chem Ltd had declined to ₹2.4 cr from ₹2.7 cr in FY2010, representing a decline of about 11.2%. However, in FY2011, the salary taken by the promoters increased to ₹0.70 cr from ₹0.48 cr in FY2010, representing an increase of about 45%. Therefore, FY2011 is another period when the promoters of the company increased their salary while the profits of the company were going down.
In the FY2015 annual report, while taking shareholders’ approval for the remuneration of Mr Rahul Nachane, Managing Director, the company intimated to its shareholders that the salary of the promoters is higher than what the legal limits permit according to the profits of the company.
FY2015 annual report, page 8:
The profits as calculated under the managerial remuneration to directors under the Companies Act 2013 are inadequate for payment of remuneration.
An investor would remember from the discussion on succession planning that in 2021, Mr Ahaan Nachane, son of Mr Rahul Nachane has joined the company as a vice president. While assessing the salary of Mr Ahaan Nachane, an investor gets to know that the company proposes to pay a starting salary of ₹1 cr to him.
FY2021 annual report, page 24:
to appoint Mr. Ahaan Nachane, son of Mr. Rahul Nachane, Managing Director and CEO and Mrs. Ajita Nachane, Non-Executive Director as Vice President w.e.f. 01st June, 2021 upon the terms and conditions set out in the Explanatory Statement annexed to the Notice convening this meeting for remuneration not exceeding of ` 1,00,00,000/- (Rupees One Crore) p.a. or as may be agreed to between the Board and Mr. Ahaan Nachane.”
Going ahead, an investor should keep a close watch on the salary taken by the promoters and their family members from the company.
Advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?
6) Related party transactions of NGL Fine Chem Ltd with the promoter-group entities:
While analysing the transactions of the company with the entities owned by the promoters, an investor notices that NGL Fine Chem Ltd had done many transactions with one entity: Nupur Remedies Private Limited (NRPL)
While searching about the details of Nupur Remedies Private Limited (NRPL), an investor notices that the company has only two directors, Mr Rahul Nachane and Mr Rajesh Lawande who are the promoters of NGL Fine Chem Ltd. (Source: Zaubacorp)
Therefore, an investor would appreciate that if NGL Fine Chem Ltd were giving any money to NRPL or does any business dealing with NRPL, then it is as if it is dealing with/giving money to the promoters, Mr Rahul Nachane and Mr Rajesh Lawande.
As per the disclosures in the related party transactions section of the FY2021 annual report, page 169, NGL Fine Chem Ltd has paid a total of ₹1.1 cr to NRPL as considerations of rent (₹0.45 cr) and legal & professional fees (₹0.66 cr). This is apart from the direct payments of ₹0.64 cr done by NGL Fine Chem Ltd for rent to the promoters, Mr Rahul Nachane and Mr Rajesh Lawande. Therefore, the total amount of money paid by NGL Fine Chem Ltd to the promoters other than salary, in FY2021, is about ₹1.74 cr (= 1.1 + 0.64).
The amount of related party transactions other than salary, by NGL Fine Chem Ltd to the promoters of the company, was ₹0.36 cr in FY2014 (as per FY2015 annual report, page 49).
An investor would appreciate that the related party transactions between the listed entity and the promoters/their entities provide opportunities for shifting economic benefits from the minority/public shareholders to the promoters. If the listed entity pays a price to the promoters, which is higher than the market price of those services/rent, then effectively, these transactions may benefit promoters at the cost of minority/public shareholders.
Therefore, the investor should always do deeper due diligence of the related party transactions between the listed company and the promoter owned entities.
Going ahead, investors should keep a close watch on the transactions between NGL Fine Chem Ltd and the promoters/their entities.
Advised reading: How Promoters benefit from Related Party Transactions
7) Errors in the annual reports of NGL Fine Chem Ltd:
While going through the annual reports of NGL Fine Chem Ltd, an investor comes across a few instances where she feels that the information provided by the company in the annual report could have been better.
7.1) Trade receivables for FY2011:
She notices one such instance in the FY2011 annual report when NGL Fine Chem Ltd declared that about 92.5% of its receivables are pending for more than 6-months from the date they became due for payment. The company disclosed that out of total receivables of ₹10.74 cr on March 31, 2011, a total of ₹9.9 cr are due for more than 6-months.
FY2011 annual report, page 16:
The amount of receivables due for more than 6-months at 92.5% of the total receivables in FY2011 seemed disproportionately high because, in the previous year, FY2010, the amount of receivables due for more than 6-months were only 5% i.e. ₹0.4 cr out of total receivables of ₹8.8 cr.
An investor would appreciate that when a very large proportion of the trade receivables from the customers are due for more than 6-months, then it may indicate serious issues in the accounting assumption and sales practices of any company. It may indicate that the company may be following aggressive sales recognition where the customers have not yet agreed for payment, but the company has already recognized sales in the profit & loss statement.
It could also indicate that the customers are not happy with the quality of goods supplied by the company and therefore, are not willing to release the payments. Otherwise, it may also indicate that the company is not doing a proper credit risk assessment of its customers; therefore, the customers who have accepted the goods are not able to pay due to their poor financial position.
A very high proportion of overdue trade receivables bring all these questions to the mind of the investors.
However, when the investor reads the annual report of the next year, FY2012, then she notices that in the column for the previous years’ data (FY2011), the company has presented an entirely different picture for its trade receivables.
An investor notices that in the FY2012 annual report, NGL Fine Chem Ltd disclosed that in the previous year (FY2011), only about 7.5% of the total receivables (i.e. about ₹8 cr out of a total of ₹10.7 cr) were due for more than 6-months.
Such a drastic change in the data of trade receivables due for more than 6-months for FY2011 in the two annual reports of FY2011 and FY2012 creates a lot of confusion in the mind of investors. Whether it was a typographical error or any manipulation of information.
An investor may contact the company directly to understand the reasons for such difference in the data of trade receivables for FY2011 in the annual reports of FY2011 and FY2012.
Moreover, while reading the annual reports of NGL Fine Chem Ltd, we did not find any entry for loss due to bad debt in the schedule/note for “other expenses” where companies show the receivables that they are not able to recover from their customers as an expense/loss. However, it looks like NGL Fine Chem Ltd has not shown bad debt in any of the years for which its annual reports are available on the company and Bombay Stock Exchange (BSE) website (FY2010-FY2021).
An investor may contact the company directly to understand whether it never faced any loss in collecting more than ₹1,000 cr of total revenue from its customers over the last 10-years. This is because, NGL Fine Chem Ltd is the only company out of hundreds of companies that we have analysed until now, which has not shown any bad debt in any of its annual reports.
All the other companies have shown at least some amount of bad debt whatever small it may be. It is natural because, over years of doing business, the companies deal with numerous customers, some small and some big. Not all the customers they deal with over decades make 100% of payments against 100% of demands.
We advise that an investor should read the annual reports of the company in-depth to understand various aspects of the financial position of the company.
7.2) Contingent liabilities section in FY2019 annual report:
While reading the FY2019 annual report, in the contingent liabilities section, an investor notices that the company has shown NIL contingent liabilities for FY2019.
FY2019 annual report, page 114:
However, while reading the description of the contingent liabilities, the investor gets to know that the company has contingent liabilities of ₹948,364 in FY2019 as disputed income tax demands.
It looks like the company by mistake did a typographical error in which it disclosed the amount of disputed tax demand in the description; however, missed mentioning it in the table column.
Nevertheless, an investor may contact the company directly to get a clarification about the true position of contingent liabilities in FY2019.
It is advised that the investor should read the annual reports carefully so that she does not miss the information due to such errors by the companies.
Advised Reading: Understanding the Annual Report of a Company
8) Attempts by NGL Fine Chem Ltd to save on taxes:
While reading about the company, an investor gets to know about an order passed by the Income Tax Appellate Tribunal – Mumbai against NGL Fine Chem Ltd on July 30, 2018 (click here).
The order is related to a case in which the Income Tax officials found out certain transactions where NGL Fine Chem Ltd had taken allegedly fake invoices from some entities, which were known to issue fake invoices without the actual supply of goods or services. These entities are known as Hawala Dealers. The company, which takes these fake invoices, and shows these as expenses, reduces its profits and thereby reduces the tax payout by the company.
While doing their investigation, the income tax official (Assessing Officer, AO) found that NGL Fine Chem Ltd has availed such fake invoices from these Hawala Dealers and he/she penalized NGL Fine Chem Ltd.
The company challenged the penal orders first to the Commissioner of Income Tax (Appeals) [CIT (A)] who agreed with the findings of the assessing officer (AO) that NGL Fine Chem Ltd had inflated its expenses by using fake bills from Hawala Dealers.
Thereafter, NGL Fine Chem Ltd appealed against the CIT (A) order in the appellate tribunal. In the order dated July 30, 2018, the Income Tax Appellate Tribunal – Mumbai found that NGL Fine Chem Ltd had indeed availed these fake invoices from the Hawala Dealers. The following sections of the order (click here) would help the investor.
assessee is unable to substantiate his purchases from the claimed suppliers who has already been established as hawala dealers
Therefore, it is held that the assessee has inflated its expenses by taking bogus bills of purchases from the hawala dealers.
An investor may contact the company and ask whether the company further appealed against the penal order in the courts or it paid the said charges.
Going ahead, an investor should keep a close watch on the developments related to NGL Fine Chem Ltd appearing in the media and online space. It is advised that an investor may set up Google alerts for whichever companies she intends to track in the online space.
Advised reading: 7 Signs to tell whether a Company is cooking its Books: “Financial Shenanigans”
9) Weakness of internal controls and processes at NGL Fine Chem Ltd:
While assessing the company, an investor comes across certain instances, which indicate that the internal controls and processes at NGL Fine Chem Ltd leave room for improvement. Let us see some examples.
First, the company made mistakes in the reporting of its shareholding pattern for June 2019. The secretarial auditor highlighted the mistakes done by the company in the FY2020 annual report. As per the auditor, the company had shown a public shareholder as its promoter; therefore, it showed its promoter shareholding higher than what it was.
FY2020 annual report, page 52:
there was an error in submission of shareholding pattern filed for quarter ended 30th June, 2019. The corrected shareholding pattern were filed from quarter ended 30th September, 2019 in which an entity from the “public” group was shown in the “promoter” group, consequently, increasing the promoter shareholding.
In FY2014, NGL Fine Chem Ltd entered into a settlement agreement with SEBI by paying ₹275,625/ for a delay in disclosing shareholding to the stock exchanges.
FY2014 annual report, page 13:
The Company has voluntarily filed consent application with SEBI pursuant to delay in filing of disclosures… An order dated 8th October 2013 was received from SEBI levying a settlement charge of Rs. 2,75,625/- which was paid…
Additionally, by doing an independent search for the regulatory orders against NGL Fine Chem Ltd, an investor comes across certain instances where the company was penalized and a fine was levied by BSE.
The following screenshot from the website WatchoutInvestors (click here) shows a few orders passed by regulatory authorities against NGL Fine Chem Ltd:
The above screenshot mentions the order passed by BSE on December 31, 2019, when the company did not submit a corporate governance report for the December 2019 quarter. BSE penalized NGL Fine Chem Ltd for ₹759,920/-. Unfortunately, an investor is not able to find any reference to this order of BSE and the fine levied against the company in its FY2020 annual report.
Similarly, there is another order of BSE where the company did not submit the shareholding pattern for March 31, 2008, to the Bombay Stock Exchange.
From the above discussion, an investor would notice that on numerous occasions, NGL Fine Chem Ltd has missed meeting the regulatory requirements.
In addition, on a few occasions, the company did not make undisputed payments to the govt. authorities when they became due. In FY2018 and FY2019, it did not make the undisputed GST payments on time.
- FY2018 annual report, page 29: Goods & Service Tax under Reverse Charge Mechanism: Rs.2,14,836/-
- FY2019 annual report, page 83: Goods and Service Tax Under Reverse Charge Mechanism: ₹ 98,984/-
Going ahead, an investor should keep a close watch on such incidences indicating a weakness in the internal processes and controls of the company. An investor would appreciate that companies that have weaknesses in controls and processes are at a higher risk of fraud.
An investor may read the case of National Peroxide Ltd, a Wadia Group company, where the managing director of the company attempted to take advantage of the weaknesses in the internal processes and controls and did fraud on the company: Analysis: National Peroxide Ltd
The Margin of Safety in the market price of NGL Fine Chem Ltd:
Currently (November 11, 2021), NGL Fine Chem Ltd is available at a price to earnings (PE) ratio of about 27.7 based on consolidated earnings of the 12-months ended September 30, 2021 (i.e. Oct. 2020-Sept. 2021). An investor would appreciate that a PE ratio of 27.7 does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, which takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Analysis Summary
Overall, NGL Fine Chem Ltd seems a company, which has grown its sales at a growth rate of 24% year on year for the last 10 years. The sales of the company have grown consistently over this period except in FY2020 when it saw a marginal decline. The company has improved its profitability significantly over the last 10-years (FY2012-FY2021) from 11% to 31%. The major role in the improvement is played by the entry of the company in high-margin products, reduction of crude oil prices, high capacity utilization and a good recovery by the company after the Coronavirus pandemic.
Nevertheless, an investor should note that the API industry is highly competitive with many suppliers willing to undercut prices to take away market share from others. As a result, despite being a market leader in many of its products, NGL Fine Chem Ltd does not have pricing power over its customers. The customers of the company are pharmaceutical companies, which are knowledgeable buyers and once the quality of the product is approved, then they prefer suppliers only based on pricing. The customers do not give any premium pricing to any supplier or brand.
NGL Fine Chem Ltd does most of its business by short-term spot business contracts. As a result, always, the company has to revise the prices of its products as per the market price and there is no price certainty.
The company is small-sized; therefore, it does not have many resources to spend on R&D and is not able to show strong negotiation in buying raw material. There have been periods where the raw material prices increased by 50%-60%; however, the company could not pass it on to the customers and its profit margins declined.
The company needs specialized raw materials with only a few suppliers. For many raw materials, China is the sole and the cheapest supplier. Therefore, at times, the company faces challenges in getting the raw material. There have been periods when the company could not get raw material for some of its products for many months and as a result, its business suffered.
The business of NGL Fine Chem Ltd is working capital intensive where it has to give a long credit period to the customers. Additionally, it has to keep a lot of inventory with itself so that it can be a reliable supplier to its customers. As a result, a lot of money from NGL Fine Chem Ltd is stuck in the inventory and receivables.
NGL Fine Chem Ltd has expanded its capacity significantly over the last 10-years; however, at times, capacity expansion projects have witnessed time and cost overruns. There were two fire incidences in the company’s plants and during the recent incidence, the insurance company refused to reimburse the loss incurred by the company. It might be a case of fire due to the company’s negligence.
An investor is surprised to note that many plants of the company were not compliant with the pollution control guidelines. As a result, on multiple occasions, it had to shut down production in its plants on the govt. orders. It is now spending about ₹10 cr on effluent treatment plants; however, despite this spending, about 25% of the company’s production would be from such plants, which are still not compliant with water-pollution control guidelines.
It seems that the promoters of the company have put in a succession plan because; the son of one of the promoters has joined the company as a vice president in 2021. There have been instances when the promoters have increased their salaries in the years when the profits of the company had declined. The son of the promoters has joined the company at a starting salary of ₹1 cr per annum.
The promoters have entered into many related party transactions with NGL Fine Chem Ltd either directly or via their companies. These transactions vary from giving properties on rent to the company and other legal & professional services. The scope of these transactions has increased significantly over the last 10-years. An investor should analyse these transactions closely.
The data presented by the company in the annual report seems to leave scope for improvement. The cash flow calculation shows the inclusion of borrowings and finance costs in the cash flow from investing section instead of the financing section. The cash flow from operating activities shows the inclusion of investment in stocks and mutual funds, which should be shown under investing activities. On other occasions, the company has shown different data of trade receivables for FY2011 in the two annual reports of FY2011 and FY2012.
There have been a few instances where the company was penalized by the regulators for not making the required disclosures on time. At other times, the company made mistakes in disclosures like shareholding patterns. At times, it did not deposit the undisputed statutory dues to the govt. authorities on time. It looks like the internal processes and controls at the company need strengthening.
On one occasion, the income tax department penalized the company for using fake invoices to reduce its tax payout. The company appealed against the order; however, the appellate tribunal held the company guilty of using fake invoices from Hawala Dealers and asked the company to pay the penalty.
Going ahead, an investor should closely monitor the profit margins of the company to assess whether the company is able to pass on the increase the raw material costs to its customers or the competition has caught up with it resulting in a decline in profitability. The investor should monitor the progress of the capacity expansion projects to understand whether the company is able to complete them within time and cost estimates. Also, she should keep a close watch on the pollution-control measures being taken by the company in its plants.
The investor should keep monitoring the working-capital utilization efficiency of the company and see if the company continues to generate surplus cash flow from its operations. She should read the annual reports of the company carefully so that she can avoid making errors in her conclusions due to unusual presentation of financial transactions by the company in sections like cash flow statements etc.
The investor should keep a close watch on the remuneration of promoter family members and the related party transactions of the company with the promoters. These transactions have the potential of shifting the economic benefits from the minority/public shareholders to the promoters. She should monitor the disclosures by the company to understand whether it has improved its internal controls and processes. She should also set up Google alerts for the company so that she can get to know about any development about the company in the online space that the company may not include in its annual report.
Further advised reading: How to Monitor Stocks in your Portfolio
These are our views on NGL Fine Chem Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.
You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”
I hope it helps!
Regards,
Dr Vijay Malik
P.S.
- Subscribe to Dr Vijay Malik’s Recommended Stocks: Click here
- Mumbai “Peaceful Investing” Workshop, July 27, 2025: Register here
- To learn stock investing through videos, you may subscribe to the Peaceful Investing – Workshop Videos
- 25% savings on buying our Stock Analysis Excel Template and all ebooks together: Analysis Package: Excel Template + All eBooks (25% savings)
- To download our customized Stock Analysis Excel Template for analysing companies: Stock Analysis Excel
- Learn about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
- To learn how to do business analysis of companies: e-book: Business Analysis Guide
- To pre-register/express interest in a “Peaceful Investing” workshop in your city: Click here
Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
8 thoughts on “Analysis: NGL Fine Chem Ltd”
Dear Vijay Sir and Neha Madam,
Very comprehensive analysis as always. I always wonder how these companies of decent size do not prepare proper cash flow statements. Fire accidents and dishonour of claims by the insurance company require proper investigation. Additionally, the misrepresentation of trade receivables due for more than 6 months also raises a lot of concerns. Thanks for such an insightful read.
Thanks & Regards,
Omkar Ranjan
Thanks for sharing your feedback and views, Omkar.
Sir, thanks a lot for the analysis of NGL Fine Chem Ltd. It was super helpful. I just have one doubt regarding the data of receivables days presented in your excel template. We can notice that as per your excel template NGL Fine Chem in 2020 had receivables days of 45, whereas Screener.in shows it as 53 days and also as per the standard formula it comes out to be 53 days. I just want to know whether you have done any changes in the formula while calculating it or is it a technical problem.
Thank you.
Dear Om,
You may read the following article to know the formula that we use to calculate receivables days: Receivable Days: A Complete Guide
Regards,
Dr Vijay Malik
Hi Vijay Sir,
My query is with regards to the analysis shared on NGL fine Chem Ltd. There have been a lot of governance issues reported in your analysis including hawala dealers, and high remuneration. Despite such issues, it has been a big wealth creator. Could you please suggest, which aspects of governance should be ignored and which not while investing?
Dear Akshay,
You may go through the following article to understand more about management analysis, which is a big determinant of corporate governance: How to do Management Analysis of Companies?
To understand how dubious management can hurt shareholders’ interests, you may read the following article: Why Management Assessment is the Most Critical Factor in Stock Investing?
An investor should realize that by investing in the stock of a company, she is effectively handing over her hard-earned money to the promoters of the company. Therefore, when she comes across any governance-related issue in any company, then she should ask herself this question: Would I like to hand over my money to this person?
If she feels that her money would be safe with such a promoter, then she may ignore the governance-related issues; otherwise, she should look for any other company.
Regards,
Dr Vijay Malik
Wonderful analysis. Governance appears to be weak. Are they able to grow their sales and profitability at the same rate in future without Capex or R&D? Surprising that the stock is in Additional Surveillance Measure (ASM) and frequently hits upper or lower circuits. Never understood the reason for such volatility.
Dear Govind,
Thanks for sharing your feedback.
It is anybody’s guess whether the company would be able to maintain its sales growth and profitability in future. We do not have any views on the expected future performance of the company.
The stock price of any company may fluctuate due to numerous factors; both related to its fundamental as well as other factors like macroeconomic situation, investor sentiment etc. Therefore, we find it difficult to have any view on the movement and volatility in the stock prices.
Regards,
Dr Vijay Malik