Investment rationale
One of the largest players in API, a leader in several products: The company is one of the largest players in API with >80% business comes alone from this vertical followed by formulation and specialty chemicals. It is the leader in the top 10 products that it manufactures. It is the world's largest producer of a. Nimesulide (Pain management) b.Ketoconazole (Anti-fungal) c.Fluoroquinolones (Antibiotic) d.Tinidazole (Antibiotic) e.Metformin (anti-diabetic) f. Metronidazole Benzoate (antibiotic). It exports its products in >100 countries having 50+ API molecules. The products are manufactured through 12 manufacturing units. Top 10 clients contribute >76% sales but has diversified clientele. Most of the leading formulation companies have long term relationships with Aarti which ensure repeated businesses give its >3 decades of experience. The formulation is backwardly integrated with which nearly 20% of API capacity is used for captive consumption.
Deleveraging balance sheet; improvement in margin due to rising formulation share: Company’s specialty chemicals and formulation vertical is steadily rising while API’s share is declining and thus helping it to generate better EBITDA margins. While comparing FY20 versus FY19, API composition dropped 4% while formulation, specialty chemicals, and others gained overall pie. EBITDA margin on YoY basis improved 84 bps while debt dropped nearly Rs180 crore when compared with FY18. Its manufacturing facilities at Tarapur and Sarigam are supported by the R&D section located at Tarapur, where the focus is mainly on process developments. The company has nine products under the different stages of development while four are under pipeline across different therapeutic areas.
Strong industry drivers: Global pharmaceutical industry is expected to reach $1.43 trillion by 2020. India is the third-largest pharmaceutical market in Asia and is the major provider of generic drugs globally. India is the World's largest provider of Generic Medicines. With the high potential for generic drug market in India, Indian pharmaceutical companies received record 300 generic drugs approvals in the USA during 2017 and are expected to reach US$ 88 billion by 2021. India’s pharmaceutical industry is highly fragmented with >1000 players in CRAMS and 14% market share in the world’s formulation exports. Formulation export is expected to grow in double in the next five years while domestic API market size to reach nearly USD 19 billion by FY22. The drivers are a) Manifold rise in public healthcare spending b) Increase in the size of middle-class households c) Improvement in medical infrastructure d) Increase in the penetration of health insurance and e) Unveiled of 'Pharma Vision 2020' aimed at making India a global leader in end-to-end drug manufacture. Over and above, India’s cost of production is approximately 33 percent lower than that of the US while patient pool expected to increase over 20 percent in the next 10 years, mainly due to rise in population plus >160,000 hospital beds expected to be added each year in the next decade.
Attractive financials: The Company has a strong balance sheet with minimal debt (D/E <0.5x) backed by A+ rating. The company generates a strong EBITDA margin of 13% and has a +16% return profile. The quarterly earnings since the last few quarters are also attractive. At the current price, the stock is trading at 20x of its TTM June 2020 consolidated earnings.
- Market Cap: 4,384 Cr.
- Current Price: 1,882
- 52 weeks High / Low 1905.00 / 421.00
- Book Value: 266.86
- Stock P/E: 24.20
- Dividend Yield: 0.11 %
- ROCE: 20.35 %
- ROE: 22.68 %
- Sales Growth (3Yrs): 14.51 %
- Listed on BSE and NSE
- Company Website
- Face Value: 10.00
- PEG Ratio: 2.25
- Promoter holding: 60.51 %
- Pledged percentage: 0.00 %
- Debt: 378.11 Cr.
- Price to Earning: 24.20
- EPS: 80.32
- Net profit: 187.14 Cr.
- Profit growth: 116 %
- Profit growth 7Years: 16.02 %
- Net profit preceding 12months: 135.68 Cr.
- Profit growth 3Years: 20.43 %
- Dividend yield: 0.11 %
- Debt to equity: 0.61
- Sales last year: 1,635 Cr.
- Sales growth: 18.18 %
- Unpledged promoter holding: 60.51 %
- Investments: 20.38 Cr.
- Intrinsic Value: 2,893
| Compounded Sales Growth | |
|---|---|
| 10 Years: | 13.51% |
| 5 Years: | 8.50% |
| 3 Years: | 14.51% |
| TTM: | 18.18% |
| Compounded Profit Growth | |
|---|---|
| 10 Years: | 17.27% |
| 5 Years: | 10.75% |
| 3 Years: | 20.43% |
| TTM: | 115.98% |
| Stock Price CAGR | |
|---|---|
| 10 Years: | 38.68% |
| 5 Years: | 23.00% |
| 3 Years: | 49.89% |
| 1 Year: | 318.24% |
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