Re Post: Anuh Pharma

Draft 1
 The company is one of the largest manufacturers of macrolides, a kind of antibiotic drugs in the country.Among the macrolides,the company manufactures antibacterial erythromycin base and several other variants (primarily recommended)for throat infections by ENT specialists and General Physicians); it is the largest producer of erythromycin salts in the country. The company also makes higher macrolides including azithromycin, roxithromycin and clarithromycin;quinolones like ofloxacin; chloramphenicols and over a dozen corticosteroids. The company also offers an Anti TB Drug called as Pyrazinamide. All these products are being manufactured at the company’s Tarapur facility near Mumbai. The company also owns a state-of-art integrated laboratory to carry out research and development activities; this facility was acquired from a Spanish company in April, 2012. The R&D facility includes a chemical synthesis lab, an analytical development lab and a kilo lab with the view to cater to Contract Manufacturing. The R&D facility will help the company in intensifying their research & development activities with a view to enlarge the bulk drugs portfolio. All these things have helped Anuh Pharma to carve out its own niche in the world of APIs. The company is looking at different opportunities in untapped markets and also across a value chain. Today, the company is known for its Government recognized ‘Star Export House’ status; governed by cGMP, the company enjoys World Health Organization’s (WHO) version of GMP (Good Manufacturing Practice). In addition, the company has also filed several Drug Master Files (DMFs) submitted to European Directorate for the Quality of Medicines & HealthCare (EDQM) & US Food & Drug Administration (US FDA) which could create immense opportunities for erythromycin’s exports to US and Europe, going forward. The company has been exporting one-third of total production to over 57 countries and the company recently received approval from COFEPRIS (Health Authority of Mexico) GMP certificate for three of company's erythromycin products.

update:

Anuh Pharma is around Rs 330 this morning !….yet down from ex bonus High of Rs 414.75 on August 12,2015…It was a liberal 2:1 Bonus with xb date being August 5,2015.Cum Bonus the Share Price was at times over Rs 1000. 52 Week xb High of Rs 414.75 implies a cb Price of Rs 1244 while today’s xb price of Rs 340 implies a cb price of Rs 1020 .It was at just Rs 130 twenty months ago in January 2014.Gains are @ 700 % since then in 2014-15 till date

The Face Value is Rs 5 and the Equity has jumped from Rs 4.18 crs to Rs 12.54 crs with the Bonus

FY 15 PAT was @ Rs 22 crs with EPS over Rs 26.Reserves at March 31,2015 were Rs 96.7 crs giving a networth of @ Rs 101 crs and a Book of @ Rs 121

Post the Bonus the Book had moved to just over Rs 43 (Rs 40 at March 31,2015) after considering the Rs 8 crs profit in Q 1 FY 16

Assuming a FY PAT of Rs 25 crs and Rs 30 crs the FY 16 EPS would be @ Rs 10 and Rs 12 respectively

Fy 15 the Dividend was a healthy Rs 7 or 140 % (Interim of Rs 2 ~40% & Final of Rs 5 ~100%)…this was @ 26.5% payout from FY 15 Profits.Assuming similar payout for this year the Dividend should be @ 50% to 55 % on enhanced capital and would entail payout towards @ Rs 7 crs

Adjusted for FY 16 Projected Dividend the Networth should be @ Rs 120 to Rs 125 crs giving a Book of @ Rs 48 to Rs 50 at March 31,2016

Using FY 16 Projected EPS & Book at the current share price of Rs 340 this would give a PE Range of 28 to 34 and a PBV of @ 7

Even if Zero Debt such Valuations are High and need to be supported by high CAGR or non linear growth in the offing over the coming years or a Takeover Situation.Last 5 Years CAGR on Topline is 10% and on Bottomline is 12%….. exciting to run up such Relative Valuations?.So if it’s not based on the Past is there any Game Changing or Life Changing Future or Takeover that’s exciting ?

Though the Company has acquired 7800 sqm adjoining existing 3600 sqm Tarapur,Boisar Factory Land for expansion it also states that they have enough capacity to produce more on demand and increase market share without further capex spend…they have a rated capacity of 900 mtpa for macrolides etc though maximum achievable capacity is 1140 mtpa and 12 mtpa for Corticosteroids…they are currently operating at 65% of the achievable capacity …that should be @ 750mtpa

FY 15 Annual Report does not show any significant addition to Fixed Assets on account of the 7800 sq m land purchased .This must reflect in FY 16 accounts

FY 16 Topline is expected to be Rs 325 crs with continuing double digit ROE and ROCE with over 40% coming from Exports.

Thus it would seem a depreciating Rupee can be a favourable situation until one observes that in FY 15 the FX Spend on CIF Imports,Commission & Travelling were to the tune of Rs 185 crs while Export FOB Revenues were @ Rs 120 crs….so there’s a net outgo….Moreover USA was not where Exports went although they have submitted the DMF to USFDA for two Erythromycin products . 41% of FY 15 Sales came from Exports of which @ 75 % were from Europe and Latin America with the rest coming from Africa and Asia.

Thus FX Operations are in excess of Rs 300 crs in the Company and this would require Currency & Treasury management expertise to manage.FY 15 Annual Report reveals an FX Loss of Rs 2.78 crs,Raw Material Imports of Rs 193 crs,Brokerage & Commission Expenses of Rs 2.98 crs

Anuh Pharma is the largest producer of Erythromycin Salts in India and in the Top 5 in the World for both Erythromycin and anti TB Drugs (Pyrazinamide).Competition is from South East Asia and China.It commands an 18% & 20% Global Market Share for Erythromycin Salts & Pyrazinamide respectively

Anuh Pharma is part of the SK Group of the Mumbai based Shah Family and for FY 15 it presented it’s 55th Annual Report….It however completed 25 years of production on February 14,2014 when it declared a special interim dividend of Rs 1.25 for this

Interestingly the Authorised Capital is now increased in great quantum from Rs 10 crs to Rs 51 crore to facilitate the liberal Bonus and more pointedly to facilitate issue of fresh equity in requirement for funds

They also now have an enabling resolution to borrow upto Rs 200 crs.

This clearly is for the Expansion on the new adjoining land of 7800 sq m,that’s over twice existing Tarapur land of 3600 sqm, that would serve Regulated markets with a State of the Art Facility planned to be commissioned by FY 17

What is really interesting is that the New Authorised Capital has room for fresh issue of 7.7 cr shares !…at current market price of Rs 340 that would mean raising over Rs 2500 crs through Equity ! while Borrowing Powers are restricted to just Rs 200 crs !…..If the Funds are raised to this maximum the Networth flies past Rs 2600 crs from just Rs 120 crs ! and the Capital Employed jumps from Rs 120 crs to over Rs 2800 crs with Full Borrowings of Rs 200 crs

What a Giant Leap this would be assuming such Quantum of Funds are required for Projects !….Project & Expansion Capex & Cost Details are not available

Such a Leap would take Promoter Holding down to just 17.5% assuming they do not participate in the fresh equity exercise.Such a drastic dilution would make the Promoters vulnerable and is therefore unlikely

They currently hold 71% already in an exiting Equity of Rs 12.54 crs.They can hold a maximum of 75% which if the Equity does move to the maximum 10.2 cr shares and Rs 51 crs they can hold a maximum of 7.65 cr shares from the current 1.79 crs they hold.That would require them to infuse Rs 2000 crs themselves.Nah!.What probably will happen is that Promoters will dilute their Equity Stake to quite some extent in the Fresh Infusion of Equity Funds,most probably through a Preferential Allotment or QIP Placement.Currently there is no institutional holding

Clearly the Shah Family which holds over 71% (up from 65% earlier this year) or 1.79 crs of the Equity is very ambitious and realise that after 55 years they have just Rs 120 crs networth to show in the Company although with today’s over 10% rise in share price the Market Cap has crossed Rs 830 crs ! making the Shah Family worth nearly Rs 600 crs only on this Flagship Company.This Company is run by Bipin Shah,MD while his Director Brother Bharat Shah overseas other enterprises in their SK (Sevantilal Kantilal) Group.They say the Group’s Employee strength is over 2000 but Anuh Pharma shows just 130+ on it’s rolls as per the FY 15 Annual Report.Thus one can assume Group Financial Strength is much more than listed Flagship Anuh Pharma indicates.They do deserve a compliment for keeping Director Salaries Scales at fair and acceptable levels to other stakeholders of the company.We see many Promoters unjustifiably reward themselves in several crores annually through Salaries,Perquisites and Incentives

Looking at Global Demand for Macrolides etc there appears little reason for Expansion of Capacities by Anuh Pharma unless the New Facility is for Newer Products and Newer and Bigger Regulated Markets…there is promise and hope of both in the years ahead but the journey could be long

I have recommeded Anuh Pharma 20 months ago in January 2014 at Rs 130 levels and at 330 ( before split ) and Market Cap of Rs 100 crs on a networth of @ Rs 80 crs and has risen nearly 700% to current xb Rs 340 in the period and a Market Cap of near Rs 850 crs and a Networth of just over Rs 100 crs.

Strong Hold / Add more on declines.