SMS PHARMACEUTICALS LTD - BUY

After two years long bull run in pharmaceutical sector, it is not very easy to find stocks at reasonable valuation from this sector based on their past  financial performance.But based on the future growth potential ,still there is few pharma companies overlooked my market participants are available.This week let us look into one such company – SMS Pharmaceuticals.

                                                                                 This Hyderabad based API manufacturer and Contract Research and Manufacturing (CRAM) service provider came out with an IPO in 2007 @ a price of Rs.380 .Even this company went to public only few years back,promoters having vast experience in this field and most of the key persons behind this company was once  associated with  Cheminor Drugs . (An old time favorite pharma company in listed space promoted by Dr.Reddy's Lab which  later merged with Dr.Reddy’s Lab itself ). CMD and Joint MD of SMS were the key executives  in  the R&D division of Cheminor Drugs .SMS  mainly in the production of  Ranitidine HCl, Sumatriptan Succinate, Sildenofil Citrate, Omeprazole Magnesium, Ramipril, Almotriptan maleate, Gemcitabine HCl, Imatinib Mesilate and their intermediates. In addition to this about 20 products are in pipeline which either came out of patent recently or to be be come out in near future . Company have six manufacturing facilities located at Jeedimetla(two units) Bollaram ,Bachupally ,Kandivalsa and Khazippally and two  R &D facilities  at Gagillapur and Hyderabad  –all in AP.Two of its manufacturing facilities  are USFDA approved sites .At a time of stringent scrutiny process of US regulator and in the background of recent incident of loss of USFDA approval even for some big pharma companies ,SMS’s these two USFDA approved facilities are really an important asset for the company.In addition to USFDA ,its production sites are approved by other regulators from Japan,Germany and other European countries .Company exporting products to more than 70 countries across the glob and more than 50 % of income is coming through exports.SMS  is the larget producer of Ranitidine HCl in the World.

Recent Developments and Financials

Earlier in 2012-13 company sold one unit to Mylan Pharma for Rs.170 Cr .Using  this fund , company paid back part of its debt and an amount of Rs.46.5 Cr spend for buying  back of its own shares .SMS bought back  15 lakhs shares at an average price of Rs.262 . Balance of funds utilized for the upgradation  and expansion of its other facilities and for working capital requirements.Now post  completion of expansion ,company started to deliver good performance .In the latest December quarter SMS reported a jump of 100 % in top line to Rs.138 Cr and a profit of Rs.8.40 Cr against a loss of Rs.17 Cr.For the Nine month ended December SMS reported a topline of Rs.355 Cr and a net profit of Rs.9.44 Cr .On an equity base of Rs.8.47 Cr ,9 month EPS is Rs 11.10 ( ln last full year , if we exclude the other income component company was in loss and its operating cash flow were negative ) .Company started to report robust performance only from second quarter of this financial year after the completion of the expansion of all its manufacturing facilities ( See table below) .

                                     Click on the image for a better view
                          ( March 13 quarter profit was due to one time income)

I expect company will start to report full potential from next financial year onwards and FY 2014-15 may end with an EPS in the range of Rs.35-40 .Since public float is low ,liquidity is less in this stock.Promoters holding close to 64 % stake (NIL pledge) and big investors including GulfPharmaceutical Industries holding another 17.5 % stake.

Stock is currently trading @ Rs.240 which is far below its IPO price of Rs.380 and below its recent buyback price of Rs.262 . Since this recommendation is based mainly on the anticipated performance in future and its low liquid nature ,it is a high risk high profit kind opportunity and recommending only to those having capacity to take such a risk @ CMP Rs.240. Stock listed in both exchanges .

Link to company website HERE

Latest Annual Report HERE

Disc: It is safe to assume that I have vested interest in all stocks I am recommending.