November 24, 2006
Bal Pharma Ltd. Visit Note
Bal Pharma Ltd. (BPL), a mid sized pharma company focused on the domestic and semi-regulated markets is jointly promoted by Mr. Ghevarchand Surana of Micro Labs Group, which has a turnover of over Rs.3bn, ranked No.20 in the Indian Pharma Industry and the Siroya family, a multi-million dollar non-resident group based in Dubai. BPL clocked revenue of Rs746mn and PAT of Rs29mn for FY06. The management aims to clock revenue of Rs3-3.5bn over the next 4-5 years. For FY07 & FY08, the management has given a revenue guidance of Rs1bn and Rs1.35bn and profitability guidance of Rs60mn and Rs110mn respectively. At Rs38, the stock is trading at 6.8x FY07E and 3.7x FY08E.
Highlights Bal Pharma focuses on branded generics and bulk drugs in the domestic and exports market. Around 60% of revenue comes from the domestic market. The company has presence in 42 countries in the export market. The company has received CoS from EDQM on gliclazide in 2005 and is looking at scaling up contract manufacturing for the EU market. Gliclazide clocked revenue of Rs108mn in FY06. The current capacity is 3T/ mth expected to be ramped up to 12T/mth over the next few years.
The management has indicated ebastine, a low volume high value product as another strong driver for growth over the next few years. BPL is planning to be a contract manufacturer for the Japanese and EU markets. The company is very close to receiving a CoS for the product. Domestic formulations market is estimated to grow at a CAGR of over 25% for the next two years. BPL is expanding its network in the North Indian region. The company has field force strength of 600MRs. The management has indicated that it is in negotiations with a foreign company,
which would acquire a strategic stake in BPL. The final decision is likely to be announced over the next six months
November 23, 2006
Opto Circuits (India) Ltd. CMP: Rs330 BUY
We met the management of Opto Circuits (India) Ltd (OCIL) for an update on the operations of its core business and EuroCor. While the core business is expected to record 30% plus revenue CAGR to Rs2bn over FY06-08, EuroCor is increasing its geographical coverage with presence in 29 countries. By the end of December 2006, EuroCor is expected to have presence in 36 countries. However, net margins for EuroCor may be subdued in the short term on account of heavy advertising and promotional expenditure. OCIL has indicated that its products have started gaining preference with cardiologists who attended various seminars, conferences and live workshops. As far as US market for stents is concerned, appointment of Dr. William Walter O’Neill on board is likely to expedite the process for USFDA approval, but it is still 18-24 months away.
The management indicated that they would look at acquisitions, which could be a good strategic fit over the longer term and available at the right price. We believe OCIL would consolidate operations of EuroCor in the near term and focus on increasing penetration in key geographies. OCIL is also looking at conducting certain low-end manufacturing operations for EuroCor in India. As OCIL is under 100% EOU till 2009-10, tax outgo on those operations will be nil, which will again cut cost and boost margins.
We are confident that OCIL will witness revenue CAGR of 63% to Rs3.7bn over FY06-08. We estimate EuroCor to contribute at least 30% to the total revenue and profitability by FY08. The core business is also witnessing continuous demand for its products from the international markets. We firmly believe that the company is on track to witness earnings CAGR of 61.1% to Rs1bn over FY06-08. At Rs330, the stock is trading at 28.8x FY07E EPS of Rs10.4 and 18.4x FY08E EPS of Rs16.3. We maintain a BUY from a 12-month perspective.
November 22, 2006
Strides Arcolab Ltd. Not Rated CMP Rs331
Strides Arcolab Ltd. (STAR) is one of India’s leading integrated manufacturers and exporter of finished pharmaceutical dosage forms with focus on niche molecules, which are difficult to manufacture or clinically difficult to prove efficacy. The company has significant presence in soft gels (18% of revenue) and sterile & immunosuppressant (32-35% of revenue). Semi-solids, another focus area, which could emerge as a significant growth driver for the company forms 10% of revenue. Finished dosage accounts for over 95% of the revenue for the company.
STAR has adopted a partnership model strategy for the regulated markets where it shares upsides and risks with its partners whereas it has set up its own front end for the semi regulated markets. STAR has 13 manufacturing facilities globally. The management has guided towards a 30% plus topline growth for CY06 and CY07 driven by increasing contribution from the regulated markets particularly America and Asia Pacific. Operating margins would start heading northwards as contribution from regulated markets increases. STAR is going through a consolidation phase post a series of acquisitions in 2006, full impact of which would be visible post H2 CY07. At Rs331, the stock is trading at 30.4x Q3 CY06 annualized EPS of Rs9.9.
November 21, 2006
Biocon Ltd. Not Rated CMP Rs265
Biocon Ltd., established in 1978, started as a manufacturer and exporter of enzyme. The company gradually shifted focus to a life science driven generic company with fermentation technology. Biocon is again going through a transition phase from being a generic company to a discovery led life science company. Statins sales will be a major growth driver in the short term, whereas immunosuppresants, non-injectable insulin, Monoclonal Antibodies (MABs) and custom research will be Biocon’s drivers in the longer run.
However it will take some time for Biocon’s key growth drivers to start delivering. Statins supplies for Simva and Prava have commenced to the US while Biocon commands a 30% market share for the European market. Pricing pressure has eased in the European market but it could be severe in US when competitors enter the market post exclusivity. Sharp growth in immunosuppreants would be triggered when key patents expire in US/ Europe in FY08-10. Oral insulin is a big opportunity for Biocon but competition from established players may be higher than expected.
Non-injectable insulin, a potential blockbuster is at least three years away from a potential launch. Biocon’s head & neck cancer molecule – BioMABEGFR has been launched successfully but will take some time to realize the full potential of the market. The only visibility in the near term is the continued growth momentum in the custom research space, which has witnessed revenue CAGR of 52% over FY01-06. Custom research projects are gaining increasing traction and are likely to maintain the current growth rate. At Rs358, the stock is trading at 20.9x H1 FY07 annualized earnings. We feel there is little downside to the stock from current levels but upsides could be capped unless key growth drivers start delivering earlier than expected
November 21, 2006
Thermax Ltd Q2FY07 and H1FY07 - Result Update.
Topline grows by healthy 26.2%, which is due to 30% growth in its energy division and 19.7% growth in its environment division. During the quarter the company’s revenue composition of domestic:export stands at Rs3800mn:Rs900mn. For the first half this stood at Rs6.4bn:Rs1.5bn. During the quarter contribution of energy to total revenues improved to 76.3% from 74.8% last year and for H1FY07 this was at 77% and 73.3% in H1FY06.
Operating margins for the company during the quarter expanded to 15.7% against 13.6% in the corresponding period last year. This is after negating Rs231mn of one time expenditure in ME Engineering and two other subsidiaries. Of this Rs105mn are towards ME Engineering and Rs120mn towards the two other subsidiaries. During the quarter raw material costs declined by 290bps which helped in margins expanding.
On a segmental basis the energy division experienced an expansion in margins by 330bps to 16.9% against 13.6%.
The company has accounted for operations and losses of ME Engineering over FY05, FY06 and H1FY07. Since the performance of the step down subsidiary has not been in line with the company projections the board of directors have decided to refer it to administration and as per the laws of UK. Henceforth no losses of the company will reflect in Thermax Ltd.
The order book on standalone basis stands at Rs26.6bn and consolidated basis stands at Rs29.7bn. This order (standalone) is 1.8x its FY06 revenues of Rs14.7bn. During the quarter, energy experienced 38% growth in orders inflows and environment registered 85% growth. It is undertaking two large orders of Rs4bn each with a delivery schedule of 17-23 months as against normal schedule of 14-16 months.
The company is in the midst of capacity expansion at its Baroda facility. It will be spending about Rs1.8bn at Savli, Gujarat. This facility is expected to commission within 12-18 months. Of this Rs1.8bn about Rs1.2bn will be spent on the boiler and heater division and the remaining will be spent on the cooling and heating division.
Thermax registered a bottomline growth of 68.2% to Rs582mn during the quarter against Rs346mn in the corresponding period last year. It closed H1FY07 with a bottomline growth of 65.4% to Rs857mn against Rs518mn in H1FY06. This translates into half yearly annualized earnings of Rs14.4.
With the order backlog more than doubling to Rs26.6bn the outlook for the company is positive in the near term. The only major risk will be in retaining its skilled workforce. The company’s effort to cater to an upsurge in demand is clearly visible from the capex being undertaken at Baroda. The management expects to close the year with a topline growth of about 30%. The stock is currently trading at 24.7x its half yearly annualized earnings of Rs14.4.