Defensive series: Stocks to Buy in a bear run ( Continued )

Marksans Pharma

Marksans Pharma, which was a wholly-owned subsidiary of Glenmark Pharmaceuticals, manufacturers generic pharmaceutical products, such as soft gelatine capsules & tablets across regulated markets, in niche segments. It supplies its products to 25+ countries globally; UK, followed by US, are its largest markets. Its export business contributes to more than 99% of revenues with a focus on regulated markets.

Marksans’s manufacturing facilities are based in Goa and Southport (UK). These are audited by some of the most demanding global regulatory agencies in the US, UK and Australia. The business is driven through three subsidiaries—Nova Pharmaceuticals (Australia), Bell’s & Sons (UK) and Relonchem Ltd (UK).

Abbreviated new drug application (ANDA) approvals, led to a ramp-up in the US business in the past two years. Softgel product ibuprofen (OTC) is now selling at leading stores like Walmart, Walgreens and CVS. Other non-softgel ANDAs have also been approved and are being marketed via partners in the US. The softgel capsules market offers an edge to Marksans due to the complexity of developing the softgel formulation and high operational costs in running a manufacturing facility. 

It has generated a strong revenue growth in the past three quarters ended December 2014, averaging 34%. Operating profits grew 44% over this period, with an operating profit margin of around 30%. It enjoys a RoCE of 41% while market valuation is an expensive 22 times operating profits.

JB Chemicals & Pharmaceuticals

JB Chemicals & Pharmaceuticals manufactures and markets pharmaceuticals formulations, herbal remedies, and APIs in India. Its three brands, viz., Rantac (anti-peptic ulcerant), Nicardia (calcium channel blocker) and Metrogyl (amoebicides), feature the top 300 brands in terms of value and unit sales, as per data from IMS MAT March 2014. It is ranked 36th in the industry, with these three brands.

 

 

Its total exports income amounted to Rs574 crore which represents 58% of total operating revenue for FY13-14. The API business continued its upward momentum and, with sales of Rs99.33 crore, registered a growth of 59% over the same period, thanks to its wide presence in the international market. Its manufacturing facilities have approvals from authorities US, UK, Australia, South Africa, Ukraine, etc. JB Chemicals aims to create an additional capacity for tablets, liquids, ointments, vials, eye-drops, lozenges and diclofenac API plant by investing Rs140 crore on expansion. Clearly, there is no slowdown in its business. Over the past three quarters ended December 2014, the company has averaged a revenue growth of 11% and an operating profit margin of about 18%. This is one of the few companies on our list which makes a low RoCE of 11%. The stock is appropriately valued—lower than others. Its market-cap/operating profit is around 12. 

Century Plyboards

Century Plyboards is the largest producer of laminates in India and accounts for 7.5% share of the national plywood market. Year-on-year volume growth in plywood production was nearly 10%; it was about 19% in laminates, for the quarter ended December 2014. Almost 23% of the company’s revenue is from exports. Century Plyboards is looking to diversify into modular furniture and kitchen furnishings. It has six strategic manufacturing facilities across India to meet the steady growth in real estate and construction which will drive its growth for years to come.

All ply-board manufacturers face issues with raw materials from time to time, thanks to stricter conservation policies. Myanmar banned export of timber in August 2014 to save its disappearing forests. But Century Plyboards was not affected by the ban because it had set up a semi-processed peeling facility in Myanmar in 2013. So, while rivals, such as Greenply Industries, were hit by skyrocketing timber prices, Century Plyboards could easily export timber from its Myanmar facility. Revenues have grown at a steady rate of around 20%-25% each quarter and it was able to maintain an operating profit margin of 10%-15% over the past seven quarters. Century’s RoCE is 26% and the stock is quoted at 18 times its operating profit.

TVS Srichakra

TVS Srichakra is a well-known maker of tyres for two-wheelers, three-wheelers and off-road vehicles. It plans to launch radial tyres for two-wheelers in a couple of months. Its domestic clients include Atul Auto, Bajaj Auto, Hero MotoCorp, Honda Motors Cycles, Scooters India and TVS Motor Company. It exports its products to the Australia, Europe, Africa, South America and United States. It recently entered into 15 new export markets and now exports to over 80 countries. Exports constitute about 13% of its turnover.

TVS Srichakra enjoys the highest market share amongst two-wheeler manufacturers in India. It is projecting a 15% expansion this fiscal and similar growth next year, as it expects two-wheeler sales to rise. Over the past three quarters ended December 2014, it averaged a 17% growth in revenues. Operating profit growth averaged around 70% over this period. TVS Srichakra has maintained an operating profit margin of 9%-10%. The more positive part of the stock is its valuation. While it enjoys a RoCE of 30%, its market-cap to operating profit is around 8. 

The stocks discussed in this Cover Story will be less vulnerable to a market decline because these companies are on a track of higher growth. The growth comes from a business model that combines domestic and export revenues, or substantial export revenues. Unless there is a synchronised global downturn, as happened in 2008, these companies are expected to do well.