9 January 2019

IOL Chemicals and Pharmaceuticals Limited

IOL Chemicals was established in 1986. It is headed by Varinder Gupta (Chairman and MD) and Vijay Garg (JMD). Rajinder Gupta, one of the co-founders in 1986 is now the promoter of Trident Ltd. The company derives it’s revenues majorly from Ibuprofen API and Ethlyn Acetate. In FY18, bulk drugs contributed 63% of the revenues, while in FY17 this share was 56%. IOL Chemical has a presence in more than 50 countries across the globe.


Ibuprofene is a drug that is used to treat pain. BASF’s Texas unit which had a 5000 TPA Ibuprofene API capacity was shut down in June due to technical reasons. Ibuprofene API has an annual demand of ~ 35,000 TPA globally. However, even before BASF’s unit shut down, the Ibuprofene API supply chain was facing issues due to problems in India and then in China.
  • The 3 major Ibuprofene API makers in China. In India, Granules, Solara and IOL Chemicals are the key players.
  • IOL Chemicals has increased capacity from 7,200 TPA to 10,000 TPA in August 2018.
  • The plant is running on 100% capacity due to global supply-side constraints.
  • The domestic demand (India) for Ibuprofene API is ~ 5,000 TPA. IOC Chemicals exports 50% of it’s production.
The price of Ibuprofene API is rising up due to supply-side issues. Now, the drug’s prices are regulated and thus the already wafer-thin margins of final formulation makers are going down. This could result in reduction in production volume of the drug, which is already low priced.


The company’s revenues have grown at a rapid pace. Although aided by an improving EBITDA margin, the PAT was low / negative due to high debt and interest costs.
The performance ratios have improved on various parameters in FY18.

  • For the quarter ended 30th September, 2018 the debt has reduced to Rs 350 Crores vs Rs 422 Crores at the end of FY18.
  • The revenue for H1FY19 was Rs 785 Crores. In H1FY18, the revenue was Rs 433 Crores.
  • The PAT for H1FY19 stood at Rs 52 Crores. In H1FY18, the PAT was just Rs 7 Crores.

Invest or Ignore?

The market capitalization of IOL Chemicals is ~ Rs 1,100 Crores. The stock trades at Rs 197.5 (FV:10). The PE Ratio is 14.69.
IOL Chemicals is heavily dependent on Ibuprofene API for revenues. The financials have improved only because of the steep rise in Ibuprofene API prices caused by supply side problems. The revenue and PAT growth is temporary as the market size of the API is also not big. The stock price has appreciated more than 240% over the last one year. This clearly indicates that the good news is factored in. Once the shut units are reopened, the revenues will decline on account of both volume and price. Also, there are red-flags like high promoter salaries, taking related party loans, dilution of equity and high interest costs which don’t work well for retail shareholders. BASF is coming up with new capacities by 2021 which will increase competition for the company.
For long term investors, we would not recommend this stock. However, for those looking for short term positions, the momentum behind the price and revenue can continue for some more time. However, once the correction sets in the stock can melt > 50% in a short time with frequent circuits. So, the allocation should be less and there has to be a stoploss in the trade.
When a stock is rising, we cannot predict the top and the end of the momentum.

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