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)
( 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 .
