Research - Business...

Research

RESEARCH:: COMPANY: AARTI DRUGS LIMITED (SMALL CAP) 09th April 2010

Stock Info (TTM Basis)

Sector Pharma Market cap (Rs Mn) 1263.52 Face value 10 Book value 99.41 EPS 19.36 Cash EPS 30.2 Dividend 30% Sales Growth 15.3% Debt to equity 1.67% 52 week H/L 117.8/36.55 Avg. Daily Vol (2wk) 105000 Managing Director PM Patil Incorporation 1984 Listed At NSE/BSE Equity capital 121.1

Aarti Drugs Ltd (ADL) is the part of Rs 12.65bn Aarti Group of industries, ADL was established in 1984. The company focuses on the anti-diarrhea, anti- inflammatory therapeutic groups. ADL is into manufacturing of APIs and intermediates. The customer profile of ADL includes Pfizer, Searle, Knoll Pharmaceuticals, Glaxo, etc.

Key Highlights:

The company is the market leader in anti-diarrhea, anti- inflammatory & anti- biotic therapeutic segment. These segments are expected to perform well.

Two of its major API’s Ciprofloxxacin Base used for Anti Biotic Segment, ade Diloxanide Furoate used for Antidiarrhoeals Segment is among the top exported Bulk Drugs in India.

The stock is available at 1.05x of its book value of Rs 99.41, with the improved company’s earning visibility, we expect the stock will attract more value.

Future Outlook At the current price of Rs 104.9, the stock is available at 8.16x of its FY09 earnings, 4.93x of its FY10E earnings and 3.30x of its FY11E earnings. We recommend BUY with a price target of Rs130-135, given that the company’s future shows potential.

Particulars (Mn) FY09 FY10E* FY11E*

Revenue 3697.3 4725.3 5623.11

Expenditure 3107.5 4019.3 4695.30

PBIDT 589.8 706 927.81

Interest 247.9 147.8 157.32

Depreciation 110.4 135 148.72

PBT 231.5 423.2 621.77

Tax 81 167.35 217.62

PAT 150.5 255.85 404.15

EPS 12.85 21.26 31.80

CEPS 22.28 32.46 43.50

OPM (%) 15.62 14.87 16.40

NPM (%) 4.00 5.42 7.19 Source: Company Reports, Fairwealth Research Estimate *Estimated

Mr. Rajesh Gupta (CIO) Prakash C. Pandey (AVP-PMS) Varun Khanna: - (Research Associate)

CONTENTS

Key Highlights & Future Outlook…………………………..Page1

Company Profile……………..Page3

Peer Comparison…………….Page4

Financials of the

Company…………………………Page5

Why to Invest in Shares of Aarti Drugs Ltd……………….…….…Page10

Long Term Buy CMP Rs104 Target price Rs 130-135 Estimated EPS Rs 23 Projected PE 6-7 Investment period 6-12 months

Buy‐ Aarti Drugs Ltd.

Aarti Drugs Ltd.www.fairwealth.in/research.aspx

Key Concerns:

The Bulk Drugs manufacturers typically generate lower return on

capital employed as compared to formulation companies.

The Bulk Drugs business is largely driven by scale of operations, which requires huge capital investment. Aarti drugs Ltd is relatively a small company in the segment. The company is facing pricing pressure from the increased competition.

Generic drugs companies, the largest client of API,s are also

becoming backward integrated, to work on cost effective measures, this could results in lower demand for APIs manufacturers.

0.00

5.00

10.00

15.00

20.00

25.00

30.00

0

1000

2000

3000

4000

5000

6000Revenue Growth Rate

Revenue Growth Rate

0

5

10

15

20

25

30

35

EPS

(%)

EPS Growth Rate

EPS

Linear (EPS)

The Revenue of the company is expected to grow at a CAGR of 19.5% to Rs 5623.11mn from Rs 2767.5mn over FY 2006-07 to FY2010-11E respectively.

The growth in revenue will be largely driven by capacity expansion of API segment; however the company is also looking towards specialty segment and contract manufacturing to boost the revenue and to improve the operating margins.

The company EPS is expected to grow to Rs 31.80 by FY2010-11 with a CAGR of 30.67% over the FY 2005-06 to FY 2010-11 respectively.

Gro

wth

Rat

e %

The copharmacare appr

FICorp

7.9

Po

4

Shar

ADL formuessentuberc

The ctherapprofilediclofe

ompany is aceutical indusroved by US F

Is/ orate

93%

ublic & others1.65%

re Holding paDec,

is in to malation and Chtially used in

culosis.

company haspeutic group e like: tinidenac sodium e

all set to stry, as the c

FDA.

FIIs0.39%

attern as on 2009

anufacturing hemicals. Its n curing diar

s strong prewith strong

azole, metroetc.

cater to glcompany’s pl

Promo50.0

31st

of APIs, products rhea and

sence in product

onidazole,

Aarti DestablinflamADL ichemi API’s ADL’sregulaand ofThe cGlaxo The m

Produ

obal ants

The

Anti

AntidAnti

Antif

AntiaOste

Anti

Anti

Antid

Alzh

Anti

Card

Vitam

oters03%

Drugs Ltd is tlished in 198

mmatory therapis into manuficals, such as

(Active PharAPIs and Int

ted markets. Tffers outstandinustomer profi, etc. The grou

anufacturing f

uct Profile O

rapeutic Seg

inflammatory

diarrhoeals / protozoals

fungals

arthritis/ eoporosis

histamine

biotic

diabetic

heimer’s treatm

BPH

dioprotectant

mins

COM

the part of Rs84. The compeutic groupsfacturing of Abenzene, sulp

rmaceutical termediaries aThe company ng services. ile of ADL incup is also eng

facilities of th

f the Compa

gment

y AcecPotasDicloMetroSecnFuroa

Ketoc

Leflu

Levo

Cipro,Spa

Metfo

ment Rivas

Tams

Clop

Niaci

Buy‐ A

Awww.fairw

MPANY PROF

s 12.65bn Aartmpany focuses. APIs, Steroidsphonly chlorid

Ingredients) re marketed ihas superior

cludes Pfizer, gaged in contr

e company ar

any

clofenac,Diclofessium,Diclofen

ofenac Resinateonidazole,Metr

nidazole,Tinidaate

conazole,Terb

nomide,Raloxi

ocetirizine,Lorat

ofloxacin HCl,Erfloxacin

ormin HCl,Piog

stigmine Hydro

sulosin HCl

idogrel Bisulph

in,Niacinamide

Aarti Drugs Ltd

Aarti Drugs Lwealth.in/re

FILE

ti Group of ines on the a

s, intermediatde etc.

n the domestitechnology, hi

Searle, Knollract manufact

re located at T

APIs

enac Sodium,Dnac Diethylamme,Nimesulide,CronidazoleBenzzole,Nitazoxan

inafine HCl,Tol

fene HCl

tadine

Enrofloxacin Ba

glitazone HCl

ogen tartrate,R

hate,Irbesartan

e

Pa

d.

Ltd.esearch.aspx

dustries, ADLanti-diarrhea,

tes, and spec

ic and internagh quality pro

l Pharmaceuturing activitie

Tarapur & Sari

Diclofenac monium, Celecoxib zoate,Ornidazonide,Diloxanide

lnaftate

ase, Gatifloxaci

ivastigmine Ba

,Ticlopidine HC

age 3

x

L was anti-

cialty

ational oducts

icals, es.

igam.

ole,e

in

ase

Cl



Peer Comparison: Particulars(MN) Aarti Drugs Ind-Swift Ltd Shasun Chemicals Surya Pharma Orchid Pharma*

Market Cap 1263.52 1152.50 2850.52 2650.60 11313.01

Sales 4584.1 6455.7 5011.8 9753.9 12600.3

PBIDT 694.3 786.2 470.6 1546.5 2565.9

Net Profit 234.5 299.5 121.6 668.6 -118.5

EPS 19.36 8.05 2.52 46.21 -1.68

P/E 5.39 3.86 23.41 3.96 -93.54

EV/PBIDT 4.33 6.08 9.96 4.9 14.3

P/BV 1.04 0.53 1.39 1.15 1.65

Dividend (%) 30 20 0 12 10 Figures on TTM Basis, * Consolidated

0

5

10

15

20

25

30

2005 2006 2007 2008 2009

Aarti Drugs Ind-Swift Ltd Orchid Pharma

-10

-5

0

5

10

15

20

2005 2006 2007 2008 2009

Aarti Drugs Ind-Swfit Lab Orchid Pharma

Operating Profit Margin

Net Profit Margin

Aarti Drugs Ltd has managed to maintain a healthy operating margin of over 15.6% as compared to its peers.

The operating margin of other companies in APIs segment has been dented. However, the ADL is able to witness an increment of 305 bps.

However, the Low Net Profit margin of 4% is a cause of concern, as the interest cause is high for the company.



QUARTERLY ANALYSIS:

During the quarter ended on 31st Dec, 2010, Aarti drugs Ltd has recorded an impressive 28% (y-o-y basis) jump in the net sales to Rs 1170.3mn from Rs 916.1mn during the corresponding period last year.

The operating profit of the company witnessed a growth of 47% to Rs 148.3mn as against Rs 101.2mn last year, largely on account as fall in raw material cost as a % of sales which managed to stay down by 805bps to 49.65% as against 57.70% during the Dec quarter last year. However, other expenses like employee cost and misc. expenses were high. The Operating profit margin of the company managed to improve by 171bps to 12.65% against 10.94% during the same quarter last year.

The bottom line of the company showed an impressive performance for the quarter ended on 31st Dec, 2010, it has recorded a massive

773% increment to Rs 48mn as against Rs 5.5mn during the corresponding period last year. During the quarter interest cost of the company fell by 48% to Rs 31.1mn against Rs 60mn; however the % jump witnessed in the performance of the company is largely due to low base effect last year.

Particulars (Mn) Dec-09 Dec-08 Var% Y-o-Y Sep-09 Var% Q-o-Q

Net Sales 1170.3 916.1 28% 1196.8 -2%

Add: Other Income 0.3 1 -70% 2.9 -90%

Total Income 1170.6 917.1 28% 1199.7 -2%

Less: Expenditure 1022.3 815.9 25% 1009.5 1%

PBIDT 148.3 101.2 47% 190.2 -22%

Less: Interest 31.1 60 -48% 40.9 -24%

Less: Depreciation 34.1 26.6 28% 33.4 2%

PBT 83.1 14.6 469% 115.9 -28%

Less: Tax 35.1 9.1 286% 48.1 -27%

PAT 48 5.5 773% 67.8 -29%

EPS 3.96 0.47 743% 5.79 -32%

CEPS 6.78 2.74 147% 8.64 -22%

OPM% 12.65 10.94 - 15.65 -

NPM% 4.10 0.60 - 5.67 -



PAST PERFORMANCE (Yearly)

Particulars (Mn) 2008-09 2007-08 2006-07 2005-06 2004-05

Net Sales 3765.1 3107.3 2763 2448 2330.5 Stock Adjustments -69.5 92.4 -62.9 72.6 -10.1 Other income 1.7 18.4 67.4 88.1 92.3 Total Income 3697.3 3218.1 2767.5 2608.7 2412.7 Less: Expenditure 3107.5 2809.2 2408.8 2272.2 2064.3 PBIDT 589.8 408.9 358.7 336.5 348.4 Less: Interest 247.9 134.3 112.3 106.2 70.8 PBDT 341.9 274.6 246.4 230.3 277.6 Less: Depreciation 110.4 96.3 86.2 79.2 71.5 PBT 231.5 178.3 160.2 151.1 206.1 Less: Tax 81 47.6 32.5 23.8 65.5 Net Profit 150.5 130.7 127.7 127.3 140.6 Less: Extraordinary items -0.3 -0.2 -0.3 0 0 Adj. Net Profit 150.8 130.9 128 127.3 140.6 Equity Share capital 117.1 117.1 117.1 117.1 117.1 EPS 12.85 11.16 10.91 10.87 12.01 Cash EPS 22.28 19.39 18.27 17.63 18.11 Operating Profit Margins 15.62 12.57 10.54 10.15 10.99 Net Profit margins 4.00 4.21 4.62 5.20 6.03 Book Value 102.46 93.13 84.07 74.53 65.39

During the Financial Year 2009 the Net sales of the company witnessed an increment of 21.17% to Rs 3765.1mn as against Rs 3107.3mn during the corresponding period last year. Correspondingly the PBIDT of the company worked out to be Rs 589.8mn increased by 44.25% as against Rs 408.9mn over last year, as the raw material as % of sales fell by 596bps to 63.73% against 69.69%, resulting in the increment of operating profit margin by 305bps to 15.62% over last year. However, Net profit after tax managed to register a growth of 15.15% to Rs 150.5mn as against Rs 130.9mn over the corresponding period last year, due to increased interest and depreciation cost. The interest cost of the company witnessed an increment of over 84.5% to Rs 247.9mn as against Rs 134.3mn, while depreciation rose by 14.64% to Rs 110.4mn against Rs 96.3mn over last year. The effective tax rate for the FY09 stood out at 35% against 27% last year, which resulted into higher tax liability for the company amounting to Rs 81mn. Segmental Sales

38.76%37.97%

61.24%

62.03%

0.00

500.00

1000.00

1500.00

2000.00

2500.00

2009 2008Exports Domestic sales

During the Financial Year 2009, the company exports contributed nearly 39% to the total revenue of the amounting to Rs 1459.35mn, while the major chunk of the total revenue still derived from domestic markets.

The company has increased its focused on exports, as the company saw a huge opportunity in both Japan & china.

The company currently catering to unregulated market and is expected to move towards regulated markets also.



Dividend Yield

BALANCE SHEET: Aarti Drugs Limited (Rs Mn)

2009 2008 2007 2006 2005

Net Worth 1201.9 1090.5 984.5 872.8 765.7

Loans- Term 977.7 1344.6 1176.2 1150.8 960.4

Loans - Working Capital 807.1 707.1 749.4 670.1 452.4

Deferred Tax Liability ‐171 ‐145.5 ‐122.5 ‐109.6 ‐100.1

Total 3157.7 3287.7 3032.6 2803.3 2278.6

Net Block Including WIP 1800.2 1737.9 1639.2 1496.5 1303.5

Investments 213.8 335.3 213.5 204 14.6

Net Working Capital 1143.7 1214.1 1168.4 1080.1 926.6

Deferred Revenue Expenses 0 0.4 11.5 22.7 33.9

Total 3157.7 3287.7 3032.6 2803.3 2278.6

5.86

4.07

2.19

1.69 1.94

3.43

7.89

0

2

4

6

8

10

0

20

40

60

80

100

120

140

160

2003 2004 2005 2006 2007 2008 2009PAT (Rs Mn) Dividend Yield%

0

0.5

1

1.5

2

2.5

0

500

1000

1500

2000

2500

2005 2006 2007 2008 2009

Debt/Equity Ratio

debt Debt/Equity Ratio

Aarti drugs have been paying handsome dividends from the last many years. The dividend yield of the company for the last 5 years is in between 3.43- 4%, while the average dividend yield for last 12 years is 4.93%.

This gives a positive signal of the management’s focus on shareholders wealth creation.

The Debt to equity ratio of the company is in comfort zone at 1.67%. Thus, the company can increase its leverage for value creation and capital expenditure.

The latest reserve of the company stand at 1082.70mn as on 31st March,2010.

Rs MN

Deb

t/ Eq

uity

Rat

io

Div

iden

d Yi

eld

(%)

Stock Pe

Revenue

0

35

70

105

140

0

50

100

150

200

250

300

350

0

1000

2000

3000

4000

5000

6000RS Mn

I

erformance

e & PAT

2004 200

A

140.6

12

2004-05

2005-06

Pric

ndustry Grow

5 2006Industry

Aarti Drugs

27.3 127.7

1

2006-07

2007-08

Revenue

ce Movement

wth Vs Com

2007Aarti Drugs

Small Cap

30.7150.5

2008-09

200910E

PAT

t

pany Growth

2008 200

255.85

404.15

2009-10E

2010-11E

h

9

0

50

100

150

200

250

300

350

400

450

PAT

We exto crofirst compthe bthe co

The coutperstock pCap Ind

Aarti the indas the howevthe beg

Buy‐ A

Awww.fairw

xpected the Poss the level o

time in thpany during tbasis of higheompany.

company’s strforming the price has beedex.

Drugs has bdustry in termlarge players

ver sign of reginning of 200

Aarti Drugs Ltd

Aarti Drugs Lwealth.in/re

PAT of the coof Rs 400mn

he history ohe FY11, mai

er top line gro

tock price Small cap In

en rising with

broadly underms of sales gs dominate thcovery is vis09.

Pa

d.

Ltd.esearch.aspx

mpany for the

of the inly on owth of

has been ndex. The the Small

rperformed rowth rate, e industry; ible during

age 8

x



Indian Pharmaceutical Industry

India's pharmaceutical industry is now the third largest in the world in terms of volume and accounts for 10 per cent of the world’s production. The Indian pharmaceutical industry is now over US$ 20 billion. The industry is typically growing at around 1.5-1.6 times the country’s gross domestic product (GDP) growth.

The Indian Pharmaceutical industry continues to witness growth, as expenditure on healthcare is increased, rising disposable income, changing lifestyle patterns etc.

The industry structure remains highly fragmented, with top ten major player’s accounts for only 33% of the industry. The growth rate of Indian pharma industry stands at 14.2% CAGR as against 4-6% of global average during 2006-2010. The major segments are anti-inflammatory, gastro intestinal and anti-biotic.

0

100

200

300

400

500

600

700

800

900

2004 2005 2006 2007 2008 2009E

Global Pharmaceutical Sales

Sales Linear (Sales )

Global Pharmaceutical Industry

The global pharmaceutical sales reached US$ 773 billion in 2008; however, the growth rate moderated from 6.6% in 2007 to 4.8% in 2008. The pharmaceuticals market had to contend with a number of forces including decline in new product approvals and the global economic recession, marked in particular by a sharp downturn in the world’s largest economies of USA and EU. However, the pharmaceutical market scenario was also characterized by a growth in the emerging markets Global pharmaceutical sales are expected to grow at around 6.5% p.a to exceed $823.25 billion in 2009. The shift towards pharmaceuticals for lifestyle diseases is expected to continue. The top five therapeutic segments in 2008 were cholesterol and triglyceride regulators, anti-ulcerants, anti-depressants, antipsychotics and anti-epileptics. These therapies are growing in emerging markets as well although these markets are still dominated by acute therapies such as anti-infective and gastro-intestinal categories.

The Indian API manufacturing industry is the World’s third largest and is expected to record volume of nearly $5.5 bn by 2011. Indian API manufactures will continue to face margin pressure from increased competition.



ANALYSIS & REPORT

Why to invest in shares of Aarti Drugs Limited?

US Health bill: - Big boost to Indian Pharma Industry

The US Health care bill, is a big boost to Indian Pharma Industry, Indian drug makers could see runaway growth for next 7-8 years. The US government has passed the bill to reduce the health care costs and to extend the insurance coverage to nearly 35-40 mn more Americans. The US health care bill wil promote use of low cost generic drugs, this will open huge opportunity for Indian companies with large numbers of US FDA approved manufacturing facilities outside US. Indian pharma companies – most of them being exporters of generic drugs and intermediates to the US. Currently Generics drugs from only 19-20% of the US market, which is expected to make up nearly 46-48% by 2013. To serve the US market the demand for APIs is expected to scale up from the generic drugs manufacturers.

Growth Drivers: - Indian Pharmaceuticals:

Indian Pharmaceutical Industry is poised for huge growth opportunity on all platforms across the entire segments of the industry. India with its skilled and cost effective talent pool is a preferred offshore location, coupled with that India has the maximum numbers of US FDA approved manufacturing plant outside US.

Patents worth more than US $200 bn is expected to expire during the next 3-4 years, which is a major opportunity for domestic generic and bulk drugs manufactures.

Japanese market offers new growth avenue for Indian generic players, Japan is the third most important market outside US & Europe. With

health care reforms and focus of Japanese Government to reduce health care budget, the growth prospectus for low cost Indian manufacturers were high.

Global pharma outsourcing market is expected to be $73 billion by 2011 from $43 billion in 2007, India can potentially capture 10 percent

of the Global outsourcing market by 2010, this provide a huge growth opportunity for companies engaged in contract manufacturing and R&D.

The current spending on healthcare (public and private) is estimated to increase to 10% GDP by 2016, Semi-urban and rural markets are

emerging as the new growth drivers in the domestic market. With high per capita income and increasing access to modern medicine, this segment is expected to continue its strong growth momentum.

COMPANY:

Market Leader: The company is the market leader in anti-diarrhea, anti- inflammatory& anti- biotic therapeutic segment. Therapeutic segment is expected to perform well in the coming future, as the per capita income is on the rising trend and lifestyle drugs are showing signs of improvement, coupled with increased government spending on the improving rural health. Global Presence: Aarti drugs limited have established its foot not only in India, but it has developed its presence in global markets. The company exports its products to more than 86 countries worldwide. With its plants being approved by US FDA, ADL is all set to become a global APIs player. China, US and Europe is the major overseas market for the company. The company is also planning to have its share of pie from the Japanese market, as huge opportunity is shown by the Japan for pharmaceuticals. Expansion Plans: The company has the capital expenditure plans of Rs 400-500 mn, to increase its capacity. The proposed expansion is expected to be commercialized by the middle of FY11. This will ensure improved turnover of the company.



FUNDAMENTALS:

The company will ripe the benefit from increased Weighted deductions of 175% on R&D expenditure, as the company is focused on coming out with innovations, this will boost the top- line of ADL. The company is very keen to become a major R&D player and will have its slice of cake from the India’s growing reputation of major offshore location.

ADL’s APIs product portfolio is likely to be benefited from the growing penetration of health services in rural areas of the country and

increased focused on drugs related to hygiene concerned diseases to life style drugs which are currently growing faster than the other therapeutic segments.

The company has keenly focused on the drugs which are expected to be off patent, off patent drugs will provide a huge opportunity to the company to increase its market share. ADL is also focusing on expanding its specialty and agro-chemical product line in near future, as operating margins from these segments are higher than the APIs.

With the improved in global liquidity scenario, cash cycle for the working capital is likely to improve for the Aarti Drugs limited , which will

improve the Bottom-line visibility of the company.

Notes: Figures are sourced from www.bseindia.com , capital market and annual report (2008‐09). This call hold good till nifty is above its 200 days DMA END

Disclaimer:

This publication has been solely prepared for the information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed reliable investors are advised to satisfy themselves before making any investments. Fairwealth Securities Pvt Ltd does not bear any responsibility for authentication of the information contained in the reports and consequently is not liable for any decision taken based on the same. Further Fairwealth Research report only provides information updates and analysis. All opinions for buying and selling are available to investors when they are registered clients Of Fairwealth Investment advisory services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that, Fairwealth securities Pvt Ltd, and/or individuals thereof may have positions in securities referred herein and may make purchases or sale while this report is in circulation.

FUNDAMENTAL ANALYSTS DESIGNATION CONTACT NO.

Rajesh Gupta Chief Investment Officer 0124 -3024862

[email protected] [email protected]

Prakash Chandra Pandey AVP-PMS 0124-3024864 [email protected]

Varun Khanna Research Associate 0124 – 3024874 [email protected]

Shashi Srivastava Research Associate 0124 – 3024840 [email protected]

Suvarna Binjola Research Associate 0124-3024869 [email protected]

Tanisha Jolly Research Associate 0124 – 3024864 [email protected]

Shakti Rajpal Research Associate 0124 – 3024869 [email protected]

Research - Business...

Documents

Transcript of Research - Business...