Generic pharmaceutical manufacturer, IOL Chemicals and Pharmaceuticals has decided to limit its year-on-year capex to Rs. 150 crore. Having invested Rs. 400 crore over the last few years, the company intends to fully utilize all the assets before hiking capex investment any further.

“So far, we have spent about Rs. 116 crore and this is in line with what we typically do in a year. Going forward, we do expect to spend about Rs. 150 crore or so annually. If you look at the API business what matters is the cumulative capex rather than quarterly or year-on-year capex. In last several years, we spent over Rs. 400 crore of capex and many of those assets are still waiting to be fully utilized. Therefore, rather than jump in and create more assets we are taking a relook at what kind of portfolio we want to have for the future," said Dr. Sanjay Chaturvedi, Chief Executive Officer, IOL Chemicals and Pharmaceuticals Limited, at the recent Q3 FY2022 results conference call.

The company plans to build multi-product API facilities to de-risk the overall organization. The logic is that when any particular API falls out of favour due to a variety of reasons related to market, regulatory or raw material, it will be able to manufacture a handful of API quickly. The new Capex deployment will be to support the products that are in the pipeline.

Explaining the approach for capex planning, Chaturvedi said, "On an average speciality chemical as an industry will run at 10% to 15% margins whereas the API industry will run at like 15% to 30% gross margins, so what that also means is that the amount of capex required to generate an asset that will give you revenue is different in the two industries. In the API industry typically for every Rs.100 crore that you deploy in capex, you will build between Rs. 100 - Rs. 200 crore of business over a sustained period. On the chemical side for every Rs. 100 crore that you are deploying you can create up to Rs. 300 - Rs. 500 crore business although at a much lower profitability level, so it is a question of philosophy rather than what is a better quality business as both are very good businesses."

As business derisks itself away from being a one product company, Chaturvedi is confident that they will see expansion in margins during the upcoming fiscal year. However, he rules out any plan for the demerger of chemicals and pharma business as these are closely interlinked yet very separate in terms of the manufacturing footprints.

"Many of the customer base is common and many of the chemistries are common. But having said that, one is to fundamentally understand that speciality chemicals and pharma are very different types of businesses with very different values and drivers,” said Chaturvedi.

The company already has the world’s largest capacity for ibuprofen and is now looking at expansion in new molecules as the idea is to actually de-risk the business away from ibuprofen.