SMS Pharmaecuticals - Returns @ 95% in 8 Months

Dear Reader,

We are glad to inform you that our Hidden Gem stock of April'15 - SMS Pharmaceuticals Ltd (BSE Code: 532815, NSE Code:SMSPHARMA) has given excellent returns to our Hidden Gems members in period of 8 months. Our team suggested Buy on SMS Pharmaceuticals Ltd at price of 534.40 on 09 May'15 with a target price of Rs. 1100. 

SMS Pharmaceuticals has recently made all time high of Rs. 1040 giving maximum returns of 95% to our members in period of 8 months. Today, share price closed at Rs. 978.30 giving as on date returns of 83%. We suggest our members to continue to hold the stock as we believe company will continue to perform well in coming quarters like that of previous quarter.  

In Sept quarter, net profit of SMS Pharmaceuticals rose 103.69% to Rs 10.49 crore as against Rs 5.15 crore during the previous quarter ended Sept 2014. Sales rose 12.41% to Rs 141.84 crore in the quarter ended Sept 2015 as against Rs 126.18 crore during the previous quarter ended September 2014.

Moreover, management has decided to do the sub-division/ stock split of Rs. 10/- per share of the company into the shares of Rs. 1/- each. Record date of the same is fixed as 18th Dec'15. This is a good move as it will increase overall liquidity and increases shares trading volumes in stock exchanges.

Below is the summary of SMS Pharmaceuticals Ltd shared by our team under Hidden Gem stock recommendation - April'15

1. Company Background:

SMS Pharmaceuticals Ltd. is a global player in API manufacturing having strong research and manufacturing team supported by state of art facilities. Company started off as a single facility single product manufacturing company in 1990 grew to be a multi-location group having product list spreading across an array of therapeutic segments. SMS Pharmaceuticals is currently having seven multi product facilities in operation and two research centers; SMS Pharmaceuticals has truly graduated in to big league with more than 850 employees working for it.

SMS Pharmaceuticals is an integrated pharma company with business presence in over 70 countries. SMS Pharmaceuticals is focused on API manufacturing and is the single largest producer of anti-ulcer products and is renowned among the clientele for the excellent quality of product and customer service.

The company is diversifying into CRAMS by creating research and manufacturing facilities bettering the requirements of the regulatory markets to appeal to international clientele. SMS Pharmaceuticals is venturing into highly specialized segments by building its API and formulations manufacturing facility in Andhra Pradesh to target the niche market segments.

Merger of Sreenivasa Pharma Private Ltd with SMS Pharmaceuticals Ltd has given a new boost to the company, SMS Pharma has also completed the takeover of Plant Organics.

Recently SMS Pharmaceuticals has established new state of art corporate research center with ultramodern facilities encompassing the whole gamut of research activity viz. from product conception to development, scaling up and DMF preparation. This is supported by well-equipped analytical wing and a fully functional pilot plant. This new facility will enhance our existing offerings from a contract research and custom synthesis point of view.

R&D at SMS Pharmaceuticals drives the company’s competitive edge, reflected in the introduction of pioneering products and processes with a superior price-value proposition. Strong R&D has been at the core of SMS growth since its inception. Company started R&D activities with 4 doctorate scientists supported by 20 senior chemists in a 10000 Sq.ft area.

SMS recently expanded its R&D facilities by creating a state of art corporate research center with infrastructure and expertise to carry out all the activities from product conception to the development, scale up, stability studies culminating in preparation of the DMF.

Product range of the company includes:

• API and Intermediates
• Cytotoxic Solid Dose, Sterile Cytotoxic Liquid, and Lyophilized Products
• Bio Products
• Inorganic Products
• Nutraceuticals

Different divisions of the company:

Manufacturing: SMS Pharmaceuticals Ltd. is one of the leading pharmaceutical manufacturing companies in India with world-class facilities with a wide range of process equipment fully compliant with WHO GMP standards. SMS has over the years developed tremendous manufacturing facilities to suit its style of operations and to meet the requirements of USFDA and other regulatory markets. A total of 7 facilities are being presently operated.

Research and development: R&D at SMS Pharmaceuticals drives the company’s competitive edge, reflected in the introduction of pioneering products and processes with a superior price-value proposition. Strong R&D has been at the core of company’s growth since its inception. SMS Pharmaceuticals started R&D activities with 4 doctorate scientists supported by 20 senior chemists in a 10000 Sq.ft area. Company recently expanded its R&D facilities by creating a state of art corporate research center with infrastructure and expertise to carry out all the activities from product conception to the development, scale up, stability studies culminating in preparation of the DMF.

Company’s research team now comprises of about 100 scientists with expertise in process research, analytical research and scale up. A dedicated project management team handles costing, administration, purchase, and project monitoring. R&D capabilities of the company span across reaction technologies, organic compound categories, and novel catalytic systems. This center is capable of delivering top notch contract research modules to international clientele

Future plan: SMS is building an ultra-modern API manufacturing facility near Vizag on the eastern coast of India to cater to in house production needs and also for the emerging contract manufacturing business.

2. Recent Developments: (9th May 2015) 

i) USFDA Audit at Manufacturing Facility (Unit-VII) – Apr 2015

SMS Pharmaceuticals Ltd has informed that USFDA inspection to the Unit-VII located at Kandivalasa Village, Pusapatirega Mandal, Vizianagaram District in the state of Andhra Pradesh had successfully completed. Successful GMP Surveillance inspection by USFDA of company’s UNIT-VII facility will help company to drive its revenue growth through exports. 

ii) SMS Pharmaceuticals settles legal dispute with Natco Pharma – Nov 2014 

SMS Pharmaceuticals announced that the legal disputes between the Company and Natco Pharma have been amicably settled. Out of the settlement, the Company has received a sum of Rs.15.07 crore from Natco Pharma apart from the balance principal amount receivable from the respective courts 

iii) SMS Pharmaceuticals to invest about Rs 1000 crore in Andhra Pradesh – Sept 2014 

Company is planning to gradually scale down production at its units in Telangana. On the other hand, the company has decided to invest Rs 950-1,000 crore in Andhra Pradesh over the next four-five years. The company has decided to reduce production in its five pharma units in Telangana due to administrative problems. Last year, these units generated a turnover of Rs 300 crore.

The company has two facilities in AP - in Vizianagaram and Srikakulam districts. It plans to invest Rs 400 crore in Vizianagaram unit expansion and Rs 350 crore in the Srikakulam unit. Company has taken 40 acres at the Pharma City in Vizag where it would set up an API manufacturing plant with an investment of Rs 200 crore. As per company officials, this would be ready in two-and-a-half to three years.

As informed by Ramesh Babu, Chairman of the Company, of the total required investment, promoters would contribute 35 per cent while the remaining would be from financial institutions. The company achieved a turnover of Rs 525 crore with about Rs 25 crore net profit during the last fiscal. Company is planning to reach turnover of 2,000 crore by 2019 in Andhra Pradesh.

3. Financial Performance:

SMS Pharmaceuticals standalone net profit rises 37.74% in the Dec 2014 quarter

Net profit of SMS Pharmaceuticals rose 37.74% to Rs 115.7 million in the quarter ended December 2014 as against Rs 84.0 million during the previous quarter ended December 2013. Sales rose 8.46% to Rs 1363.8 million in the quarter ended December 2014 as against Rs 1257.4 million during the previous quarter ended December 2013.

SMS Pharmaceuticals standalone net profit rises 0.78% in the Sept 2014 quarter

Net profit of SMS Pharmaceuticals rose 0.78% to Rs 51.5 million in the quarter ended September 2014 as against Rs 51.1 million during the previous quarter ended September 2013. Sales rose 4.14% to Rs 1261.8 million in the quarter ended September 2014 as against Rs 1211.6 million during the previous quarter ended September 2013.

4. Key Concerns & Risks:

i) The Company’s business activity is a single primary business segment of Bulk Drugs. In view of higher capital investment, bulk drug manufacturers typically generate lower return on capital employed as compared to formulation companies owing to thin margins and high competition. Bulk drug business being completely driven by scale of operations which results in high product concentration and pricing related vulnerabilities

ii) SMS Pharmaceutical is in a competitive market and the challenges are both from Indian manufacturers who have similar production facilities, as well as those in China. Competing pharmaceutical companies have several similar bio-equivalent products in the same markets manufactured at facilities that have been approved by regulatory authorities. All of them stay focused on the same markets with the result that price elasticity is tested and margins get eroded.

iii) Pharmaceutical industry sector is facing global competition and most effected by a high attrition rate in India. Since this industry needs trained manpower who has the requisite experience to meet the compliances with statutory requirements, good manufacturing practices, good laboratory practices, QA and QC personnel along with research personnel, high attrition can lead to impact on performance. 

5. Saral Gyan Recommendation: (9th May 2015)

i) SMS Pharmaceuticals is developing a broad portfolio of DMFs/ANDAs through non-infringing processes and intellectual properties for developing its products in regulated markets. The Company is managing cost efficiency in manufacturing environment approved by USFDA / European Regulatory Authorities. SMS Pharma has strong presence across the pharmaceutical chain, manufacturing and marketing active pharma ingredients (APIs/Bulk Drugs). The market segment for the products of SMS demonstrates growth tends every year with raising volume and value.

ii) SMS Pharmaceuticals has robust product portfolio spread over major product areas encompassing Gastroenterological, Anti-Retroviral, Anti-Migraine, Anti-Fungal, Anti-Hypertensive and other products. SMS Pharmaceuticals is the largest manufacturer of Anti-Ulcer products in the world, having forged tie ups with MNCs in Anti-Retroviral, Anti Migraine segments; significant revenue potential is envisaged apart from consolidation of existing product revenues where company is market leader.

iii) SMS Pharmaceuticals has set ambitious goal of achieving revenue of 2000 crores by 2019 (3.5X of current annual sales). The Company has world class manufacturing facilities and an enviable basket of approved markets and strong relationship built with some of the best names in the pharma industry. Company’s focus will be on expanding the markets and increasing its product portfolio, by implementing these strategies, company aims to increase its revenues, EBITDA and return on investment higher than the industry average.

iv) Company’s EBITDA and PAT margins are expected to improve going forward. During last 3 years, company has achieved revenue and profit CAGR of 31.6% and 43% with continuous improvement in margins.

v) Company sold one of its facility to Mylan Pharma in FY13 for 173 crores and used this fund to reduce debt, upgrading other facilities and working capital requirement.

vi) Company has planned to invest Rs 950 - 1,000 crore in Andhra Pradesh over the next four - five years. Company is planning to gradually scale down production at its units in Telangana and increase in Andhra Pradesh which will yield better returns on investment for the company considering new life sciences policy of AP government under which state will provide subsidies in power, water and also provide land for setting up of new life science industries in the state.

vii) Management has paid dividend to shareholders since company got listed in 2007. However, as company incurred losses in 2012, dividend was not paid out for FY12.   Considering ambitious growth plan of the company with expansion of its manufacturing facilities, we expect dividend payout to remain low with dividend yield below 1% during next couple of years

viii) As per our estimates, SMS Pharmaceuticals Ltd can deliver bottom line of 370 million for full financial year 2015, annualized EPS of Rs. 43.7 with forward P/E ratio of 12.2X for FY15, valuation looks discounted compared to peers for a company which is going through expansion and target to treble its revenue with improvement in operating margins in next 3 to 4 years

ix) On equity of Rs. 84.65 million, the estimated annualized EPS for FY 14-15 works out to Rs. 43.7 and the Book Value per share is Rs. 291. At current market price of Rs. 534.40, stock price to book value is 1.8

Considering company’s plan to work towards optimizing the capacities of its existing manufacturing facilities, adding additional capacities to drive revenue growth, and improving operating margins by offering broad product portfolio, Saral Gyan team recommends “Buy” on SMS Pharmaceuticals Ltd at price of Rs. 534.40 for target of Rs. 1100 over a period of 18 to 24 months.

Buying Strategy:

• 70% at current market price of 534.40
• 30% at price range of 470-500 (in case of correction in stock price in near term)

Portfolio Allocation: 3% of your equity portfolio

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