Stock Analysis: Poly Medicure

Poly Medicure is a leading supplier of Intravenous (IV) Cannulae, Safety IV Cannuale, IV infusion sets and blood bags. Safety IV devices itself is globally a $300-350 Mn annual market size today. (This was a 20 year patent granted to Braun in 1999, so is valid till 2018).

They manufacture around 95 products.

Subsidiaries in China and US. Egypt is a joint venture. China has been a major factor in reduction of raw materials.

Major RM is plastics, which is dependent on crude oil. Custom duty on medical and life saving equipment reduced by the Govt. in Feb’13 budget.

Revenue growth of 25% (approx.) and NPM of 12-13% from the past 3-4 years. See no reason why the revenue increase won’t continue at about 20% and NPMs sustain at 12-13% for the next 2-3 years. Forex derivative contracts expired in Oct 2012. Now, only simple forward hedging.

B Braun, BD, Hospitec, J&J, 3M and Poly Medicure are among the main players in this space. Poly Med won cases against B Braun in India and Germany and Malaysia but lost in Spain. They are planning to tie up with major OEMs and contract manufacture for them. No major plans to foray on its own due to huge costs involved.

Safety IV Cannuale sells at Rs. 18/- while IV Cannuale sells at Rs. 6/- even though it costs only Rs.0.5/- for safety. Currently, Poly Med sells IV Cannuale majorly and Safety IV Cannuale only in some geographies.

Has 3 plants – Faridabad, Jaipur and Haridwar. No expansions possible in the existing Faridabad and Haridwar plants. Jaipur SEZ plant to be operational by March 2014. They have got new land in HSIDC, Faridabad. Capital expenditure of Jaipur SEZ – 38 cr (21 cr loan, 17 cr internal accruals). Investing in Haridwar plant to focus more on domestic market. In FY14, domestic market contributed only 50-60 cr. Rest from exports. Got USFDA approval for its Faridabad plant in Dec 2010.

R&D as a % of sales:

They have increased R&D spend as a % of sales from the past 3 years.

2013

2012

2011

2010

2009

1.75%

1.36%

0.41%

0.46%

0.48%

Risks:

a) Increase in RM costs (crude oil proxy)

b) Exchange rate fluctuations (although, it’s a net exporter)

c) Changing import duty structures (although, off late, govt. has framed favorable policies towards medical and life saving devices)

d) Medical devices heavily regulated (nature of business)

Related Party Transactions and Compensation:

They score pretty high on related party transactions and compensation as a % of sales.

Series of related party transactions with Vitromed healthcare

VitroMed txns

2013

2012

2011

2010

Sales

15 cr

11 cr

8 cr

8 cr

Jobwork

21.5 cr

15 cr

13 cr

10 cr

% of PolyMed Sales

14.5%

12.4%

12.4%

13.2%

MD & ED’s compensation

2013

2012

2011

2010

MD&ED’s comp

3.5 cr

3.1 cr

2.17 cr

1.73 cr

Sales of PolyMed

252 cr

209 cr

170 cr

136 cr

PAT of PolyMed

24 cr

19.2 cr

21.7 cr

16.4 cr

% of Sales

1.4%

1.5%

1.3%

1.3%

% of PAT

14.6%

16.1%

10.1%

10.4%

Valuation and Investment theme:

Polymed looks like a 20-25% compounding story with a fairly high probability from these levels. FY13 250 cr sales, 24 cr profit. FY14E 300-310 cr sales, 40 cr profit.

Next 3 years, even if sales double (and assuming NPMs would remain at 12-13% – op. leverage would be set off by increased depreciation of Jaipur SEZ) implies 72 cr profit. Assigning a 20 multiple leads us to 1400 cr marketcap. Current marketcap 750 cr. Implies a 25% CAGR from current levels

Jaipur SEZ spend is about 38 cr and expected sales is about 100-120 cr (2.5-3x asset turnover). If some OEM comes along and if Jaipur SEZ can deliver full demand, sales can double in 2 yrs, and the CAGR would jump to 40%.

Management compensation seems extremely high. Related party txn with Vitromed also needs to be monitored.

However, there is a long ramp for Poly Medicure to grow at 20-25% CAGR. Medical disposable business is an evergreen huge business (unless, there is suddenly a replacement of IV Cannuale with some other tech.) And FY18-19, Poly Med can start selling Safety IV Cannuale anywhere in the world (Braun’s patent expires). Safety IV cannuale is 3-4 times more expensive than IV Cannuale. Think about the impact on revenues and margins.

Disclaimer: This is not a recommendation to buy/sell. This post is only for educational purposes. Please do your own diligence before buying/selling Poly Medicure

Advertisements

, , ,

  1. #1 by excelmonkey1 on January 13, 2014 - 6:31 AM

    Hello Kiran,

    What is a good level to accumulate the stock?
    Recent run up was quite steep.

    Regards,
    Excel

  2. #2 by Kiran on January 13, 2014 - 9:05 PM

    Hi,

    I think a good level is entirely dependent on the expectation of your future return. I believe if your target return is 15-20%, the current levels are also good. Buying on declines sounds a better strategy for more return, but that entirely depends on your mental makeup.

    Nowadays, this runup is not called steep at all 🙂 Every tom, dick and harry stock has run up more than 50% in the last 2-3 months.

  3. #3 by Anonymouse on January 22, 2014 - 1:12 PM

    Hey Kiran,

    Do you know of any good free resources for industry analysis of the pharma sector in India ?

    Anonymouse

  4. #4 by Ishaan Gupta (@asterix_ishaan) on March 19, 2014 - 11:16 AM

    Interesting blog. You might also like my value investing blog at http://www.igvalue.com . I would be obliged if you gave feedback.

  5. #5 by Suresh on April 15, 2014 - 11:46 AM

    Good research

  6. #6 by myvaluepickportfolio on May 9, 2014 - 2:08 AM

    Reality is stranger than fiction !

    Four years of Valuepick (vp) stock recommendations deciphered.

    Search google

    myvaluepickportfolio.blogspot.in

    and find the truth!

  7. #7 by Abdul Gafoor on June 16, 2014 - 4:07 PM

    Thanks for sharing your analysis, Very Good Indeed.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: