Let's discuss today about the stock I am most bullish on at current levels for the year ahead - Shilpa Medicare.
Another ET report suggests similar potential for Indian Oncology market,
"Chemotherapy, biologics, targeted therapy, hormonal therapy, and supportive care are the different types of available cancer treatment in India. Among this chemotherapy recorded the highest market value of approximately Rs 700 crore in 2012. Oncology market in India is forecasted to grow to Rs 3,831 crore by 2017," a study by Frost & Sullivan said."
Within the Oncology space, Shilpa offers one of the best bets in terms of seasoned capabilities and smaller market cap to ride this opportunity better as an investor. Starting from very humble beginnings in 1987 the company has shaped up well with strong R&D laden pipeline of 30+ products in the Oncology space.
As part of this agreement, Shilpa will now be able to produce five key HIV medicines i.e. Tenofovir, Emtricitabine, Cobicistat, Elvitegravir and a combination of the four, known as "the Quad" for sale in over 100 countries, depending on the medicine. Post technology transfer Shilpa will be able to produce these at an even lower cost.
Company currently has API units at Raichur (Unit I and 100% Export oriented Unit II, while Unit III is coming up). It has formulation units at Jadcherla while one coming up besides the API units at Raichur
However, one major concern for a company of Shilpa's size undergoing this major capex (100Cr+ , over 50% of the then net block) is working capital management and debt servicing.
But the Sep-30, 2013 balance sheet is a delight on both counts. The company has managed working capital beautifully, and D/E has in fact come down in the last 6 months. Also the operating cash flows over the past 6 years have always been robust.
Shilpa has been one of the many brilliant discoveries of Ayush Mittal (of Dalal-Street fame) who have been tracking this since July '09 and already sitting pretty on a five bagger. Well done Ayush :)
Before we get started on this, would ask readers to go through the following links on the pharma sector at EquityMaster and ValuePickr (use the follow up reads too).
Pharma as you know is a very complex sector and we have seen many debacles in the past one year. Sun Pharma's patent settlement with Pfizer, USFDA ban on Wockhardt and Ranbaxy are some of the major debacles which cost their shareholders heavily. Thus one must be aware of the risks before assuming this to be a "safe" or "defensive" sector.
Within the Pharma space, Oncology or Cancer drugs are showing the fastest growth.Sites one report,
"...Oncology products have grown at more than double the rate of global pharmaceuticals, with a CAGR of 8.39% during 2004–’08. Reasons for the robust growth of the oncology market are :
• Increased use of targeted therapeutics, including more patients accessing modern
targeted therapies in emerging markets
• Premium pricing for targeted brands as compared to cytotoxic therapies
and antihormonal therapies
• Longer treatment duration for patients due to longer survival and adjuvant treatment
• Earlier detection of disease with the availability of new screening procedures....."
Within the Pharma space, Oncology or Cancer drugs are showing the fastest growth.Sites one report,
"...Oncology products have grown at more than double the rate of global pharmaceuticals, with a CAGR of 8.39% during 2004–’08. Reasons for the robust growth of the oncology market are :
• Increased use of targeted therapeutics, including more patients accessing modern
targeted therapies in emerging markets
• Premium pricing for targeted brands as compared to cytotoxic therapies
and antihormonal therapies
• Longer treatment duration for patients due to longer survival and adjuvant treatment
• Earlier detection of disease with the availability of new screening procedures....."
Another ET report suggests similar potential for Indian Oncology market,
"Chemotherapy, biologics, targeted therapy, hormonal therapy, and supportive care are the different types of available cancer treatment in India. Among this chemotherapy recorded the highest market value of approximately Rs 700 crore in 2012. Oncology market in India is forecasted to grow to Rs 3,831 crore by 2017," a study by Frost & Sullivan said."
Within the Oncology space, Shilpa offers one of the best bets in terms of seasoned capabilities and smaller market cap to ride this opportunity better as an investor. Starting from very humble beginnings in 1987 the company has shaped up well with strong R&D laden pipeline of 30+ products in the Oncology space.
Oncology portfolio
Shilpa currently boasts of 25+ products strong present Oncology portfolio along with regulatory approvals across the world (and many pending). There are also 15+ oncology APIs under development. The key difference with other similar generic capabilities is the complexity involved in these. This space thus has much lower competition and hence higher margins. Also because of limited competition the post patent price erosion here is much lesser, hence provides opportunity of margins for both API manufacturers and generic marketers.AntiRetroVirals
There is an alarming increase in patients of HIV/AIDs belonging to underdeveloped economies. In June 2013, Shilpa has signed an agreement with The United Nations-backed Medicines Patent Pool (MPP) and Gilead Sciences to increase access to medicines for HIV/AIDS treatment.As part of this agreement, Shilpa will now be able to produce five key HIV medicines i.e. Tenofovir, Emtricitabine, Cobicistat, Elvitegravir and a combination of the four, known as "the Quad" for sale in over 100 countries, depending on the medicine. Post technology transfer Shilpa will be able to produce these at an even lower cost.
Formulation Foray
Backed by strong R&D capabilities from its centers at Raichur and Vizag the company is forward integrating to own formulations. The state of the art formulations unit at Pharma Park Jadcherla (SEZ) in AP will cater to Shilpa's own formulations also along with contract research and bulk API production for other partners.Company currently has API units at Raichur (Unit I and 100% Export oriented Unit II, while Unit III is coming up). It has formulation units at Jadcherla while one coming up besides the API units at Raichur
Key Subsidiaries
The subsidiaries form an important part of the Shilpa. Here's a brief snapshot of the subsidiaries.
Subsidiary
|
Details
|
||||||||||||||||||
1. Raichem Lifesciences (P) Limited (RLSPL) (Merged with parent
in FY13)
|
Incorporated as the marketing unit for their formulation foray
(in Oral, Injectibles and Lyophilised segments), it became a 100% subsidiary
in FY13. The SEZ at Jedcharla was
conceived under Raichem Lifesciences.
The subsidiary was involved in marketing activity since FY10. It
incurred overall losses (59.27 lacs in FY11, 59.14 lacs in FY12) which was
spending on establishing the marketing network. Finally with the completion
of Jedcharla SEZ, it was merged to parent in FY13 w.e.f. 01-04-2011.
The commercial operations after the initial stabilization period
(trial runs, dossiers being sent for final regulatory approvals etc.) is
expected to commence from Q3FY14 onwards.
|
||||||||||||||||||
2. Raichem Medicare Pvt limited
|
Raichem Medicare(P) Ltd. was incorporated in FY09 considering
the good demand for Shilpa's Custom Synthesis products and capacity
constraints in the existing production facilities. A 50:50 JV was formed with
the "Industria Chimica Emiliana S.r.l, Italy" and "Prodotti
Chini Alimetari S.p.A, Italy".
During FY11, with further investment of Rs.164.98 lacs in Raichem Medicare Private Limited (RMPL) it became a subsidiary of the company. The proposed Unit III at Raichur, Karnataka is coming up adjacent to Shilpa's main plant in Raichur with total outlay of 40 crores.
It earned a profit of Rs 23 lacs in FY13 from surplus funds. Civil
construction has started and company also place orders for major equipment
and machineries. It will be operational by FY 14 end-FY15.
|
||||||||||||||||||
3. Loba Feinchemie, Austria
|
Shipa acquired Loba Feinchemie, Austria through Zatortia holdings
in 2007. Up to 2013 they invested total 23.29 crores as equity. The company
turned cash positive in FY10 and profitable in FY12.
Loba Feinchemie, Austria has APIs, Laboratory Chemicals &
Customs Synthesis manufacturing facilities and the strong marketing network
in European countries. The marketing network (with their forthcoming
formulations foray) and access to regulated markets was primary reason for
this acquisition rather than immediate profitability.
|
||||||||||||||||||
3A. Zatortia holdings ( Holding company of Loba)
|
|||||||||||||||||||
4. Nu Therapeutics Private Limited (NTPL)
|
Shilpa acquired 25.08% of equity stake in Nu Therapeutics
Private Limited (FY09) a formulation developing company with an option to
acquire up to 50.1% of equity shares as a strategic investment.It acquired
further stake in FY11 to 67% ( Total equity outlay of 7.7 Cr as on FY 13 ).
Nu therapeutics possess novel oral fast dissolving thin strip technology. It commenced production in FY12 and earned cash profit. FY 13 Revenues and profits were 2.5 Cr and 3.06 lac respectively. While expansion plan has been chalked out with land acquired, machines installed, it is awaiting for the approval of Government for its new products. This technology might be future growth driver for Shilpa. |
Financials
Here's a look at the last 5 years financials, as seen from below, profits has been almost stagnant over the past 5 years, while revenues have grown 45%. Company has maintained consistent dividend payout over the past.
Figures in Rs Cr
|
FY 09
|
FY 10
|
FY 11
|
FY 12
|
FY13
|
Sales Turnover
|
169
|
270
|
296
|
324
|
378
|
Other Income
|
1
|
2
|
5
|
9
|
5
|
Stock Adjustments
|
0
|
13
|
-9
|
18
|
-3
|
Total Income
|
170
|
285
|
292
|
351
|
380
|
( - ) Raw Materials
|
94
|
150
|
154
|
202
|
212
|
( - ) Excise Duty
|
2
|
5
|
6
|
6
|
7
|
( - ) Power & Fuel Cost
|
5
|
6
|
7
|
9
|
11
|
( - ) Other Manufacturing Expenses
|
2
|
4
|
4
|
10
|
11
|
( - ) Employee Cost
|
24
|
28
|
33
|
34
|
43
|
( - ) Selling and Administration Expenses
|
7
|
11
|
9
|
13
|
19
|
( - ) Miscellaneous Expenses
|
12
|
-1
|
-1
|
7
|
4
|
Profit before Interest, Depreciation & Tax
|
23
|
82
|
80
|
70
|
75
|
( - ) Interest & Financial Charges
|
6
|
6
|
3
|
2
|
2
|
Profit before Depreciation & Tax
|
17
|
76
|
77
|
68
|
72
|
( - ) Depreciation
|
9
|
13
|
13
|
14
|
15
|
Profit Before Tax
|
8
|
64
|
64
|
53
|
57
|
( - ) Tax
|
9
|
21
|
15
|
12
|
10
|
Profit After Tax
|
-1
|
43
|
49
|
41
|
47
|
Equity Dividend (%)
|
25
|
35
|
40
|
45
|
65
|
Earning Per Share (Rs.)
|
0.0
|
19.3
|
20.4
|
16.7
|
19.1
|
Book Value
|
27
|
46
|
91
|
113
|
131
|
Looking at the common size metric, the company enjoys fairly handsome operating margins while the other costs would come down significantly with enhanced operations and further margin improvement from their formulations foray.
Common Size Metric
|
|||||
Figures in Rs Cr
|
FY 09
|
FY 10
|
FY 11
|
FY 12
|
FY13
|
Sales Turnover
|
99%
|
95%
|
101%
|
92%
|
100%
|
Other Income
|
1%
|
1%
|
2%
|
3%
|
1%
|
Stock Adjustments
|
0%
|
5%
|
-3%
|
5%
|
-1%
|
Total Income
|
100%
|
100%
|
100%
|
100%
|
100%
|
( - ) Raw Materials
|
55%
|
52%
|
53%
|
58%
|
56%
|
( - ) Excise Duty
|
1%
|
2%
|
2%
|
2%
|
2%
|
( - ) Power & Fuel Cost
|
3%
|
2%
|
2%
|
3%
|
3%
|
( - ) Other Manufacturing Expenses
|
1%
|
1%
|
2%
|
3%
|
3%
|
( - ) Employee Cost
|
14%
|
10%
|
11%
|
10%
|
11%
|
( - ) Selling and Administration Expenses
|
4%
|
4%
|
3%
|
4%
|
5%
|
( - ) Miscellaneous Expenses
|
7%
|
0%
|
0%
|
2%
|
1%
|
Profit before Interest, Depreciation & Tax
|
14%
|
29%
|
27%
|
20%
|
20%
|
( - ) Interest & Financial Charges
|
4%
|
2%
|
1%
|
1%
|
1%
|
Profit before Depreciation & Tax
|
10%
|
27%
|
26%
|
19%
|
19%
|
( - ) Depreciation
|
6%
|
4%
|
4%
|
4%
|
4%
|
Profit Before Tax
|
5%
|
22%
|
22%
|
15%
|
15%
|
( - ) Tax
|
5%
|
7%
|
5%
|
3%
|
3%
|
Profit After Tax
|
-1%
|
15%
|
17%
|
12%
|
12%
|
R&D Spends
It is highly critical for the company to maintain quality R&D spend in terms of research as well as regulatory filings. The company has in fact improved R&D spend significantly over the last 5 years.
Figures in Rs Cr
|
FY 09
|
FY 10
|
FY 11
|
FY 12
|
FY 13
|
Sales(Net of Excise)
|
166
|
265
|
290
|
318
|
371
|
PAT
|
-1
|
43
|
50
|
42
|
47
|
R&D Spend
|
0.5
|
2.2
|
1.9
|
19.3
|
21.7
|
R&D Capex
|
0.1
|
0.3
|
0.3
|
10.6
|
5.5
|
As %age of PAT
|
0.0%
|
5.2%
|
3.9%
|
46.4%
|
45.7%
|
As %age of Sales
|
0.3%
|
0.8%
|
0.7%
|
6.1%
|
5.8%
|
Forex Woes
Shilpa's quarterly numbers are often plagued by huge forex losses, but over a larger period there's hardly any significant dent to profits. Hence any short term aberrations from forex woes might provide additional entry points to long term investors here. As we see from below Forex adjusted NPM is hardly 1% above the reported average NPM.
Figures in Rs Cr
|
FY 09
|
FY 10
|
FY 11
|
FY 12
|
FY 13
|
Forex Loss/(Gain)
|
10
|
4
|
(4)
|
3
|
(1)
|
As %age of PAT
|
-988%
|
10%
|
-8%
|
7%
|
-2%
|
Forex Adjusted PAT
|
9
|
47
|
46
|
44
|
46
|
Reported NPM
|
-1%
|
16%
|
17%
|
13%
|
13%
|
Forex Adjusted NPM
|
6%
|
18%
|
16%
|
14%
|
13%
|
Robust Balance Sheet
Now comes the most interesting part. Since till now Shilpa was more of a API and CRAMs play there is high correlation between completed capex resulting into high sales over the immediate future. With Jadcherla SEZ gearing up for commercial production and foray into higher margin formulations investors might be in for exciting times.
Line Item
|
Mar-09
|
Mar-10
|
Mar-11
|
Mar-12
|
Mar-13
|
Sep-13
|
Change in Net Block (Y/Y)
|
64%
|
2%
|
-1%
|
14%
|
8%
|
58%*
|
Change in Sales (Y/Y)
|
74%
|
59%
|
10%
|
10%
|
17%
|
34%*
|
* compared to FY13E on Mar-31
However, one major concern for a company of Shilpa's size undergoing this major capex (100Cr+ , over 50% of the then net block) is working capital management and debt servicing.
But the Sep-30, 2013 balance sheet is a delight on both counts. The company has managed working capital beautifully, and D/E has in fact come down in the last 6 months. Also the operating cash flows over the past 6 years have always been robust.
Mar-08
|
Mar-09
|
Mar-10
|
Mar-11
|
Mar-12
|
Mar-13
|
Sep-13
|
|
Sales
|
95.81
|
166.43
|
264.91
|
290.29
|
318.18
|
371.32
|
249.59
|
Working Capital
|
39.04
|
21.17
|
24.95
|
124.87
|
34.69
|
84.43
|
67.00
|
Wcap as %Sales
|
41%
|
13%
|
9%
|
43%
|
11%
|
23%
|
27%
|
Op Cash Flow
|
6.93
|
29.74
|
53.52
|
42.61
|
56.73
|
43.50
|
|
as %age of PAT
|
61%
|
NA
|
126%
|
87%
|
138%
|
92%
|
|
Total debt
|
88.28
|
112.43
|
77.27
|
57.39
|
46.32
|
115.53
|
83.78
|
Net Block
|
87.85
|
144.51
|
147.55
|
146.25
|
166.61
|
180.67
|
286.01
|
Debt/Equity
|
1.00
|
0.78
|
0.52
|
0.39
|
0.28
|
0.64
|
0.29
|
Projections: Future growth ahead.
Equipped with the above here's a take on the earnings ahead. Here are the key assumptions for the proposed model to project future earnings.
Assumptions:
|
|
Operating
Margin
|
Move toward FY11 levels post full cap-ex to OPM of 25-27%
|
Depreciation
|
Considered over full Net Block as on Mar-13, Sep-13. Should
reduce from FY15 onwards
|
Interest
|
Charged considering higher outgo and debt outstanding Mar-13,
Sep-13
|
Tax
|
Considered at 25% for rest of FY14, 30% for FY15
|
Future Earnings
Period
|
FY13
|
FY14E
|
FY15E
|
Total Income
|
383.43
|
546.54
|
759.80
|
EBIT
|
59.26
|
108.33
|
171.03
|
Net Profit
|
47.46
|
80.16
|
117.57
|
% Net margin
|
12.4%
|
14.7%
|
15.5%
|
Projected EPS
|
19.37
|
21.78
|
31.95
|
Reported EPS
|
20.10
|
As discussed above, the Forex losses can swing quarterly numbers but won't materially impact the overall PAT. The reported EPS here thus deviates from Projected EPS because of recent forex loss of 9.58 Cr (in Q2FY14).
Based on a trailing P/E assumption of 18x-20x for Shilpa we arrive at the June -2015 price target of Rs 570 - 640 levels. On a 18 months time frame this is 62-73% CAGR opportunity based on current market price of Rs 280.
Views invited.
Disclosure: Invested.
