Lactose India – Unique Play on Lactulose & Contract Manufacturer for MNCs

Highlights and concerns:

1. Lactose started as contract manufacturer for Kerry in 2011 where the capacity was increase 10,000 tonnes which is mostly taken away by Kerry.
   o Charges are on cost plus basis
   o Utilization as of now is c. 6,000+ tonnes
   o Probably next year utilization level will increase to 100%

View: Strong visibility, but concerns around customer concentration. It is understood that Kerry wants Lactose to set up additional capacities for lactose. Management is currently focussing on Lactulose, which will enable them to reduce concentration on Kerry.

1. Second division: Pharma (Formulation) – Does contract manufacturing for players like Sanofi. These products are premium products where 80% products are export and 20% used locally.
   o Oectan (100% manufactured by Lactose) – Sanofi has shut down their operations in Turkey and now they source from Lactose India. Oectan is INR 100crores for Sanofi with INR 40crores or profit.
   o Though there is concentration risk, but it is less likely that Sanofi will cut short its contract with Lactose to the the approval process / formalities for assigning new capacities for manufacturing

2. Lactulose – Claims to be the largest in India post commissioning of new plant
   o Raw material is Lactose, so in-house lactose acts as supply for Lactulose plant
   o Expect to clock INR 60- 70 crores of turnover in next 2 years

View: Company has incurred capex through creditor funding / long term loan. equity requirement was brought in by sponsors.

Queries:
1. Management’s ability to market new product – Lactulose; this is different as compared to its tradiitonal client driven product segments including lactose and formulations.

1. Ability to service debt in case of delay in take-off of new project

Disclosure – hold small quanitites