Posts Tagged stockresearch

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

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Stock Analysis: Sabero Organics

I had researched on Sabero Organics about a month back but was too lazy to update on the blog. Thought would rectify it in the new year 🙂

I have not yet invested in the stock. Still reading and researching. Right now, the opportunity costs of investing are pretty high.

Brief:

Sabero Organics – manufactures agro-chemicals – fungicides, herbicides and insecticides. Sabero is a leading manufacturer of generic products in the agro-chemical space.

Investing theme is broadly – i) patents of major patented agro-chemical products will expire in 2014 ii) Due to increasing environmental concerns and consolidation in China (along with appreciation of yuan), there is a significant possibility of lower production from the Chinese along with better price from India iii) Significant operating leverage and synergies that can be achieved by the Coromandel group.

Their major products in each of the segments are:

1) Herbicide – Glyphosate

2) Fungicide – Mancozeb (registered in the first country in Europe (France) recently); potential of Mancozeb worldwide is $500M; current share is 10-11%; aspiration to take to 20%; it contributes 35-40% of Sabero’s sales (while other core products such as Acephate, Monocrotophos, Glyphosate each contribute 15 per cent to the total sales respectively with the balance 15 per cent coming from Chloropyriphos and others intermediates.)

3) Insecticides – Monochrotophos (main competitor: United Phosphorous)

Share of revenue of Fungicide:Insecticide:Herbicide is 40:40:20

They have subsidiaries in Australia, Europe, Brazil and Argentina.

2009 – 10 AR

Customers of Sabero Organics:

a) 30% of business from MNCs

b) 40% of business from domestic and international B2B

c) 30% of business from dealer distribution network

Sabero is setting up a plant in Dahej SEZ at a cost of Rs. 55 cr. Potential sales of 2-3 times investment. Funded from $9M in ECB debt and rest from internal accruals.

Increased capacity of Chloropyriphos by 50% by Sep 2010.

2010 – 11 AR

2 plants shutdown primarily due to project executions and EMS (environmental) objections

Started supplying to Brazil. Got technical registration for Mancozeb (Brazil is the 2nd largest customer after US in agro-chemicals)

Dahej plant will manufacture synthetic pyrethroids, which have a potential market size of $600M-$700M

Main RMs of Sabero – Ethylenediamine (suppliers are Akzo Nobel, Huntsman and BASF) and Phosphorous, Acetic Anhydride (main supplier Celanese)

Mancozeb plant working at 60% capacity

Supply to Europe has not begun as data protection gets over in June 2011 (Update: In 2013 AR, they do indicate they have registered in France)

40% marketshare in Monochrotophos, rest 60% with United Phosphorous (Cheminova exited the business, leading to a duopoly here)

The joint venture to co-venture partner Markan is under arbitration (Update: In 2012 AR, they have resolved it, taking a hit of approx. 2cr)

2011 – 12 AR

Coromandel (and its subsidiary Parry Chemicals) take 74.57% ownership; Sabero will contribute only 5% of Coromandel’s revenue.

There was a PIL (public interest litigation) filed against the company. Considerable investments were done in environmental management systesm and processes. April 2011 – they were manufacturing 0%; Dec 2011 – their capacity was ramped up to 75%

Manufacture of formulations has begun in Dahej in March 2012

Case with Brazilian company settled

Propineb, with a market potential of $150M – commercialization will begin next year

There has been a sharp fall in the number of Glyphosate herbicide manufacturers, and there can be a 30% reduction in capacity due to consolidation in China in the next 3-5 yrs

Power, fuel and utilities costs shot up to 13.6% vs 7% last year

RM costs also rose sharply

Domestic scale up didn’t happen properly because of availability of products (due to constrained capacity) and erratic monsoons

2012 – 13 AR

Many agro-chemicals going off-patent and due to GM seeds, there has been diversion of R&D funds from agrochemicals to GM seeds

Propineb has been launched (worldwide market of $110M)

Current status of registrations: 296 registrations on 16 products in over 54 countries (183 unique proudcts/country combo)

There has been a 40% increase in trade payables and 100% increase in trade receivables, while sales have grown by only 44%. The massive increase in trade receivables vis-à-vis sales is shown up as negative operating cashflow (-19cr) for the first time. (Are they pushing products on lenient terms then?)

There is absolutely no mention of the status of the Dahej plant.

There are planning to do some capital investment in utilities (drawing board stage), and are targeting EBITDA margins from current 10% to 15%. They can potentially do a 1000 cr turnover in FY15.

Financials:

 

FY13

FY12

FY11

FY10

FY09

Sales

515

358

413

430

367

EBITDA

51

-34

41.3

85.828

52.3709

EBITDA %

9.9%

-9.5%

10%

20.0%

14.3%

PAT

7.7

-61

11

39

22

PAT %

1.5%

-17.0%

2.7%

9.1%

6.0%

Net Fixed Assets

198

173

133

95

94

Fixed Asset Turnover

2.8

2.3

3.6

4.6

3.9

           

Domestic

41%

48%

45%

41%

 

Exports

59%

42%

55%

59%

 

H1 FY14 PAT is 26 cr. Given H1 and H2 are similar for Sabero, FY14 PAT would be 52 cr. (There would be no tax impact this year because 61 cr is carried forward from FY12. 7.7 cr has been set off. This 52 cr can also be set off against 61 cr). Tax impact would be 30% from FY15 (unless we know further status of Dahej in which case, it may be a bit lower).

PAT 52 cr. Mkt cap – 492 cr. P/E of 9.5 (Even EV/EBIT (since Sabero has debt) is about 9.5). What would be a fair valuation for such a company?

For FY15, assume best case scenario:

1000 cr turnover, 15% EBITDA margins would imply 150 cr EBITDA. 30 cr interest deduction. 120 cr EBT. 30% tax – PAT would be 84 cr. On a similar 10x multiple, we are looking at 70% upsides from here.

On a realistic basis, 1000 cr turnover, 10% EBITDA, would lead to 50-55 cr of PAT. There is no growth between FY14 and FY15 in PAT (due to full taxation in 2015). Beyond that, there are too many variables.

Of course, increased demand for Mancozeb from Europe (if France is done, other countries can’t be far behind) may further provide tailwinds.

Risks:

The major risk I see here is any PIL would lead to further pullbacks as production might be stopped. Also, GPCB has given time till mid-Feb to clear out some backlogs on environmental concerns. I think getting a clearance would be paramount (although, given Coromandel’s pedigree, don’t see much of a risk here).

Another major risk is obviously steep increase in RM prices. This is a risk on balance – as production of end product from other countries is dwindling, and as is the manufacture of phosphorous from China. We may get into a higher pricing scenario, but so would our RM cost increase. Net-net, I don’t see an asymmetric benefit of China rampdown.

Another risk is inter-party related transactions – say, if the Dahej plant production is being restructured to be a backward integrated supplier for Coromandel-Liberty merger, then the upside is going to be very limited. We need to be careful of the pricing structure here. Of course, delisting is another risk (will lead to re-investment risk)

Disclosure: I have not invested as of yet. This is not a buy/sell recommendation. This post is only for learning and posterity. Please do your own due diligence before investing

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