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NGL Fine Chem


NGL Fine Chem operates in the pharmaceutical industry and is in the business of manufacturing bulk drugs and finished dosages.

The company has reported stable operating profits on rising revenues over the last five years indicating a bit of margin compression during that period.  It reported operating profits of around 5cr on revenues of about 35cr in the last financial year.  It generated this using moderate debt.

The company, however, has also reported negative free cash flows (operating – investing cash flows) in aggregate over the last five years requiring additional debt to finance the capital expenditure.  It would need to generate commensurate future profits to justify the excess capital expenditure.

The business is primarily exposed to the risk of heavy competition in the fragmented generics market.  It is also export-dependent with a concentration of sales to Africa – exposing to foreign exchange rate risks.  In addition, it is also exposed to risks of a narrow product portfolio and inadequate research and development that could adversely affect its revenues in the face of cost-effective substitutes.

Management haven’t declared dividends in any of the last four years – presumably as a result of negative free cash flows and to ‘conserve resources’ – it is dependent on future competitiveness to justify its current capital expenditure.

Another point to note is that management explained the increase in revenues in the director’s report but didn’t bother to explain the drop in margins (and minor drop in absolute profits) – this may be a minor issue but if it indicates a deliberate bias in selective reporting – it is highly distasteful and minority shareholders would be justified in taking management assertions with a bit of caution.
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