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					                                                   Plethico Pharmaceuticals Ltd
                                                              (PPL)
 Equity Research Desk                             Initiating Coverage                                25th June 2008

Buy - Target Price Rs.475                                                                              CMP Rs.381.80
                                                Investment Rationale:
Key Data
BSE Code                              532739           Sales are expected to grow at CAGR 38% during CY2007-09E from
NSE Code                          PLETHICO             Rs.5,558.9 mn to Rs.10,485.98 mn. Operating profit is expected to
Reuters Code                          PLPH.BO          grow by 50% in CY08E to Rs.1,921.4 mn and 52% in CY09E to
Bloomberg Code                        PLEP IN          Rs.2,333.1 mn. and net profits to grow by 47% to Rs.1,673.2 and
Sensex                            14293.32             by 20% Rs.2,007.6 mn. in the corresponding period.
CMP, Rs                                 381.8
No.of Shares,mn                         34.07          Post acquisition of Natrol Inc. export as a percentage of total
Face Value                               10.0          turnover will increase from current level of 68% to 83% in CY08E.
Mcap,Rs Mn.                            13008           We estimate revenues of Rs. Rs.3,800 mn. and Rs.4,370 mn. in
Mcap,USD Mn. @ 42.97                    302.7          CY08E and CY09E respectively.
52 week H/L                          522/ 295
2Wk Avg. Daily Vol. BSE                12489           Investment of US$ 25 mn for capacity enhancement in Dubai it is
                                                       expected to yield incremental revenue of Rs.1.2bn post commercial
                                                       commencement in 2QCY09.
Share holding, March-08         % Holding
Promoter                               87.0%           OTC segment is expected to grow fastest among all the segments
FIIs                                    4.7%           by more than 50% over a period of next 4-5 years.
Public                                  2.9%
Others                                  5.4%           Within six months market launch of Allopathic products worth
Total                                  100%            Rs.100-150 mn. are expected.

Share Holding >1% ,March-08                            Low margin Contract Manufacturing business to be hived-off, we
Mavi Investment Fund Ltd                1.7%           expect improvement in operating and net profit margins.
B Arunkumar Capital & Credit
Service                                 1.2%           Company is looking out for acquisitions in Brazil or Europe in the
Sophia Growth - A share Class                          near term.
of Somerse                              2.9%
                                                Valuation
           Price Performance (%)
                                                At the CMP of Rs.381.80, the stock is available at 8.9x and 7.4x its fully
 Returns          1m      3m    6m      12m     diluted earnings of Rs.42.92 & Rs.51.50 in CY08E & CY09E respectively. On
 Absolute         -8       9    13       11     EV/EBIDTA basis, the stock is valued at 3.9x in CY08E and 2.7x in CY09E.
 Relative                                       We initiate our coverage with “Buy” recommendation with 12-
 Sensex           42      243   169     904
                                                month target price of Rs.475 based on average of DCF
                                                (Rs.479/share) and target price multiple of 11x of CY08E earnings
Analyst: Hitendra Gupta                         (Rs.472/share), with potential upside of 25%.
hitendra.gupta@spasecurities.com

 Brief Financials Revenues Growth EBITDA Net Profit                        Growth       EPS P/BV      P/E EV/EBITDA
 Rs. Mn.                      %                                              %          Rs.   x        x       x
 FY05               2,217.9          661.2   561.3                                      73.9 1.1       5.2   18.7
 FY06               3,187.0  44%     997.1   961.5                           71%        28.2 2.9      13.5   11.8
 15m FY07           5,525.1  39%   1,597.1 1,418.8                           18%        41.6 2.2       9.2    6.7
 CY08E              8,895.6 101%   1,921.4 1,673.2                           47%        42.9 1.4       8.9    3.9
 CY09E             10,486.0  18%   2,333.1 2,007.6                           20%        51.5 1.2       7.4    2.7
Source: Company, SPA Research
 Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
  Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                              Page 1 of 16
                                  Plethico Pharmaceuticals Ltd
                                             (PPL)
 Equity Research Desk           Initiating Coverage                                     25th June 2008

Company Background

       Introduction        Plethico Pharmaceuticals Ltd. (PPL) is an emerging global healthcare
                           business primarily engaged in the business of Herbal-Nutraceutical company
                           operating in diverse sectors including herbal healthcare, sports nutrition,
                           pharmaceutical manufacturing, confectionery products, hospital consumables
                           and veterinary products.

                           Plethico Pharmaceuticals Ltd., was incorporated as a private limited company
                           in 1991 and subsequently converted to a public limited company in 1993. It
                           came up with the public offer of Rs.1,100mn. in May 2006. The company
                           has modern manufacturing facilities at Kalaria and Manglia in Indore,
                           Madhya Pradesh, and at Kandla SEZ, in Kutch, Gujarat.

                           PPL operates in more than 50 countries across Asia, Latin America, Africa,
                           Russia and Commonwealth of Independent States (CIS). Currently it offers
                           more than 400 products for sale in more than 39 separate therapeutic
                           categories.

                           It conducts its business operations through four different Strategic Business
                           Unit (SBU) each of which operates as an independent profit center. The four
                           SBUs are broadly categorized into Export market and Domestic market. In
                           the export market CIS SBU and Non-CIS SBU and the domestic market
                           Consumer Products Division (CPD) / Over-the-counter (OTC) SBU and
                           Contract Manufacturing / Toll Manufacturing (CM/TM) SBU.

                           The PPL management envisages to be a Rs.50,000mn company by the year
                           2017 from the current turnover of Rs.5,500mn growing at 22% per annum.

                                                                    Revenue Growth

                                           60,000                                              200%
                                                                                               180%
                                           50,000                                              160%
                                                                 Sales       Growth

                                           40,000                                              140%
                                                                                               120%
                             Rs. Million




                                           30,000                                              100%
                                                                                               80%
                                           20,000                                              60%
                                           10,000                                              40%
                                                                                               20%
                                               0                                               0%
                                                    FY04 FY05 FY06 15m                Vision
                                                                   FY07               2017




                           Source: Company, SPA Research




Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                      Page 2 of 16
                              Plethico Pharmaceuticals Ltd
                                         (PPL)
Equity Research Desk          Initiating Coverage                               25th June 2008


    Business Segments      PPL conducts its business operations through four different Strategic
                           Business Unit (SBU) each of which operates as an independent profit center.

                           The four SBUs can be broadly categorized into Export and Domestic market.
                           Further the Export market can be divided into CIS SBU and Non-CIS SBU
                           and the Domestic market can be divided into Consumer Products Division
                           (CPD) / Over-the-counter (OTC) SBU and Contract Manufacturing / Toll
                           Manufacturing (CM/TM) SBU.

                              I) Export Markets

                                      a) CIS SBU: The Commonwealth of Independent States (CIS)
                                         SBU focuses on marketing and distribution of herbal
                                         formulations primarily in Russia, Kazakhstan, Ukraine,
                                         Moldova, Kyrgyzstan and Azerbaijan and six other CIS
                                         countries. It major products are the “Travisil”, “Mountain
                                         Herbz” and “Effertabs” and other herbal and allopathic
                                         formulations. Being majorly in cold & cough market CIS
                                         market per se requires significant sales and marketing
                                         efforts.

                                          Some major characteristics of CIS market:
                                                Price inelasticity, this gives the company an
                                                opportunity to maximize the profits by increasing
                                                the volumes.
                                                Credit sales, most of the sales are made on credit
                                                rather than on cash payment. This thereby
                                                lengthens the cash conversion cycle of the
                                                company.
                                                Seasonal market, as major products sold by the
                                                company is in the range of Cough and cold. Winters
                                                in CIS are around October to March, so these
                                                months sees peak demand for PPL products.
                                                New players are not welcomed

                                      b) Non-CIS SBU: Mainly covers Africa, Latin America, South
                                         East Asia and the Gulf Cooperation Council Countries. It
                                         major products are herbal and Nutraceutical, specifically the
                                         “Travisil”, “Coach‟s Formula”, “Mountain Herbz” and
                                         “Effertabs”. In comparison to CIS markets, credit cycles of
                                         these markets are quite shorter and going forward it is
                                         expected to decrease further as its products gain acceptance
                                         and familiarity in these markets.

                              II) Domestic SBUs

                                      PPL‟s Domestic SBU mainly consists of Contract manufacturing
                                      and Toll Manufacturing (CM/TM) and the Over-the-Counter
                                      market. CM/TM business accounted for the bulk of sales in the
Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                         Page 3 of 16
                                   Plethico Pharmaceuticals Ltd
                                              (PPL)
Equity Research Desk               Initiating Coverage                                   25th June 2008

                                             domestic SBU. CM/TM business exists to utilize the company‟s
                                             spare manufacturing capacity, particularly the cyclical nature of
                                             CIS markets. Its major customers are both the domestic and
                                             multi-national companies. Management is not gung-ho about
                                             this business due to its low margin, hence replacing it by higher
                                             allopathic business vertical over a period of time.

                                             OTC business includes Nutriscience (Coach‟s formula),
                                             Confectionary (Byte, Actifresh, and Khalo-G) and OTC (Travisil
                                             syrup and lozenge).

                                PPL has disinvested its equity holding partly in all the six subsidiaries in the
Disinvestment of CIS holdings   Rezlov Group of Companies to Azyder global Establishment, Liechtenstein,
                                for a total consideration of US$ 13.26 million yielding a capital gain of US$
                                5.23 million. This part dilution will bring down PPL‟s holding in all the six
                                subsidiaries uniformly to 45%.

                                Further, company will accrue benefits with Azyder‟s experience of operating
                                in Europe, with a view to expanding in those markets. The proceeds of this
                                divestment will be employed to acquire a minority interest in a retail
                                pharmacy chain in CIS.

                                                                                    Equity
                                                                                     Stake         Current
                                 Subsidiary                               Equity   disposed        Equity
                                 companies                Country       Stake held    off          Holding
                                 TOO Rezlov Ltd.          Kazakhstan      75%          30%           45%
                                 ICS Rezlov-Mo, SRL       Moldova         75%          30%           45%
                                 OOO Rezlov Ltd.          Kyrghyzstan     75%          30%           45%
                                 CJSC Rezlov              Russia          51%           6%           45%
                                 SC Rezlov                Ukraine         51%           6%           45%
                                 Rezlov LLS               Azerbeijan      51%           6%           45%
                                Source: Company, SPA Research




Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                  Page 4 of 16
                                   Plethico Pharmaceuticals Ltd
                                              (PPL)
 Equity Research Desk              Initiating Coverage                                                    25th June 2008


Investment Positives
                               PPL acquired Natrol Inc, a USA based US$ 100 million Herbal-Nutraceutical
„Natrol‟ Acquisition to fuel   company for a total consideration of US$ 80.8 million. This acquisition is
    the future growth          planned through a SPV registered in Netherlands in the name of Plethico
                               Global Holdings, BV, which will ultimately acquire 100% equity of Natrol Inc,
                               USA.

                               Natrol has a portfolio of Healthcare and wellness brands representing quality
                               nutritional supplements, functional herbal teas and sports nutritional
                               products. Synergistically operating in the same line of business that‟s of PPL,
                               but predominantly present in USA.

                               Natrol distributes products through more than 54,000 retailers including
                               Walgreen, Wal-Mart, CVS, Rite aid, Costco, GNC stores etc. It also supplies, in
                               small proportion, to UK and Hongkong, through its subsidiaries in that
                               countries.

                               Post acquisition, the company intends to market Natrol‟s top brands into the
                               Indian and other strong-hold semi-regulated markets. Similarly, PPL also
                               plans to launch its leading brand (Travisil, Therasil etc.) in the US markets
                               through Nutrol‟s well-established marketing and distribution network.

                               Natrol Inc, is estimated to post Rs.3,800 mn and Rs.4,370 mn in CY08E and
                               CY09E respectively. Further it is expected to grow by 15% annually giving
                               enough revenue visibility.


 Diversified product range     The company currently offers more than 400 products in 39 therapeutic
                               categories and sells it to more than 50 countries. The top five products for
                               the company are Travisil, Therasil, Mountain Herbz, Coach‟s formula and
                               Effertabs. These contribute and are expected to contribute more than 50% of
                               the company‟s total revenues for over a period of time. Apart from CM/TM
                               business contributing almost 25% of total revenues.
                                                           Productwise Revenue (Rs. mn)
                                 2500.0                                                                                       2311.1


                                 2000.0

                                 1500.0
                                               911.7
                                 1000.0
                                           577.7            626.8                                               548.3
                                                                        536.1         496.4
                                                                    430.1
                                  500.0                 329.7                    328.1                     320.6           328.2
                                                                                              70.1132.6
                                    0.0
                                           Travisil    MTN Herbz    Confect     Coach's F     Therasil     Effertab         Other

                                                                      FY06      FY07 (15 m)

                               Source: Company, SPA Research



Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                                        Page 5 of 16
                               Plethico Pharmaceuticals Ltd
                                          (PPL)
Equity Research Desk           Initiating Coverage                                    25th June 2008


                           Currently, the R&D expenditure is 4-5% of the total turnover, with a success
                           rate of 70%. PPL expects Allopathic product to commence commercial
                           operations within 6-months, translating into incremental revenues of Rs.100-
                           150 million.


Capacity enhancement in    PPL recognizes that there is significant growth potential in the Herbal-
         Dubai             Nutraceutical sector. In order to enhance its presence in Gulf Cooperation
                           Council (GCC) and other regulated and semi-regulated export market. It has
                           invested US$ 25 million in setting up a manufacturing plant in Dubai. This
                           unit, manufacturing Lozenges, will cater to the needs of all advanced markets
                           such as the US, UK, Europe and also the CIS. This will increase the total
                           capacity of Lozenges by 6 times of its existing capacity at Dubai. Commercial
                           production is expected to start by Q2CY09. Incremental revenue of Rs.1.2 bn
                           is estimated from this unit post expansion.

                                                       Existing Capacity of PPL
                                                                      Sep-2006 (12 m)       Dec-2007 (15 m)
                                     Products               Units Capacity    Production Capacity   Production
                           Basic Drug (Reprocessing)       mn Kgs      0.30      625,555     4.00    5,614,100
                           Capsules                        mn units  255.00 92,676,676     255.00 95,903,345
                           Dry Suspension /Syrups          mn units  131.40 32,828,527     131.40 34,925,951
                           Ointment/Drops/Tubes            mn units    0.08      453,770     1.03      727,842
                           Powder/Granules                 mn units    0.15      446,400     0.78      442,834
                           Tablets                         mn units 1182.50 943,052,015   1255.00 954,647,467
                           Vial/Ampoules/Injection/Kits    mn units   68.00 14,848,034      68.00 23,607,814
                           Source: Company, SPA Research



Backward integration by    In Herbal-Nutraceutical market „Formulation‟ of the products plays an
way of Organic Farming     important role to differentiate them in the market and is one of the key
                           factors to retain consumer loyalty. As in terms of competition, Herbal-
                           Nutraceutical market is similar to a Fast Moving Consumer Goods (FMCG)
                           market. Wherein it‟s difficult to differentiate between two identical products in
                           the market. So in order to augment the quality of its herbal products by
                           standardising the quality of the raw materials used so as to compete in the
                           regulated markets. To that end, it has acquired a farm in Jammu and has
                           commenced its own organic farming activities.


   Inorganic growth        Company has been successful in its current export market in semi-regulated
                           countries and has gained through the market share in that region. The
                           company further intends to exports its products to countries in which it is not
                           currently present, mainly in the regulated market like the US, UK and Europe.

                           Natrol Inc. has made a way for PPL to enter the World‟s largest Pharma
                           market which accounts for almost 50% of the global Pharma market. US
                           being the most regulated Pharma market, entering in this market, PPL will
                           gain acceptance to its products in other Regulated and Semi-Regulated
                           markets. This acquisition is one of the steps taken by the company to realize
Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                               Page 6 of 16
                               Plethico Pharmaceuticals Ltd
                                          (PPL)
Equity Research Desk           Initiating Coverage                                       25th June 2008

                           its long term objective of becoming a „Global Herbal-Nutraceutical‟ company.
                           (detail on Natrol acquisition is discuss elsewhere in the report)

                           Currently company is looking out for more acquisitions in Brazil and Europe.
                           In the EU market, it is investigating the acquisition of a mature manufacturing
                           facility and business which holds existing licenses for EU markets. The
                           company plans to acquire an established EU distribution company to facilitate
                           its growth in the EU.

                           In the semi-regulated markets, it intends to sell Herbal and Nutraceutical OTC
                           products. In the US market, it intends to sell non-pharmaceutical OTC
                           products.

                                                Regionwise break-up of revenues (Rs. Mn)
                                         Region         FY06    15m FY07 CY08E         CY09E
                                         CIS            1,110.0   1,620.0    1,490.4   1,758.7
                                         Africa           460.0     870.0      800.4     944.5
                                         Thd. Frnt.       610.0   1,280.0    1,280.0   1,638.4
                                         US                 -          -     3,800.0   4,370.0
                                         Others             -          -        91.0     224.5
                                         Total Export   2,180.0   3,770.0    7,461.8   8,936.0

                                         India           1,100.0    1,790.0   1,490.4     1,618.6

                                         Total Sales     3,280.0    5,560.0   8,952.2    10,554.6
                                         Source: Company, SPA Research



Exiting CM/TM business     Company intends to hive off its Contract Manufacturing and Toll
                           Manufacturing (CM/TM) business over a period of time due to its low margin
                           (6%) nature. Acting as a laggard in the portfolio of the company which yields
                           an average margin above 30%. Post hiving-off, we expect company to post
                           higher margins.

                                 Business Segment               FY06 15m FY07           CY08E       CY09E
                                 CM/TM (Rs.mn)                  890.0   1370.0           986.4       887.8
                                 Growth (%)                               23%            -10%        -10%
                                Source: Company, SPA Research




Non-Infringing Business    PPL‟s presence in Herbal-Nutraceutical segment differentiates itself from other
         Model             pharmaceutical companies, which are focused in preparing APIs and
                           formulations. PPL, to manufacture or marketing its product does not require
                           any regulatory approvals which is very unlike to other pharmaceutical
                           company, which are required to acquire Intellectual Property Rights (IPR) by
                           way of product patents.

                           Their presence in this niche segment of the Pharmaceutical space does not
                           infringe with the Intellectual Property Rights of other pharmaceutical
                           companies. This brings long time certainty in their revenues and profits.


Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                    Page 7 of 16
                                                       Plethico Pharmaceuticals Ltd
                                                                  (PPL)
Equity Research Desk                                   Initiating Coverage                                                              25th June 2008


  Robust Sales Growth                          We estimate sales to grow at CAGR 38% during CY2007-09E from Rs.5,558.9
                                               mn to Rs.10,485.98 mn. Natrol Inc. will be consolidated from CY08E and it is
                                               expected to contribute Rs.3,800 mn. to the Herbal-Nutraceutical segment.
                                               Due to this Herbal-Nutraceutical segment will grow almost by 200% in CY08E
                                               to Rs.6,530.0 mn from Rs.2,730.0 mn posted during the previous year.

                                             Segment wise Revenues for 15m FY07

                                                                        Total Turnover
                                                                        Rs.5560 Millions




                                   Export                                                                           Domestic
                            Rs.3770 Millions (68%)                                                            Rs.1790 Millions (32%)




        Herbal / Nutraceutical                    Allopathic                                     CM / TM                              OTC
        Rs.2730 Millions 72%                 Rs.1040 Millions 28%                          Rs.1370 Millions 77%                Rs.420 Millions 23%
        (49% of the Total Turnover)           (19% of Total Turnover)                       (25% of Total Turnover)              (8% of Total Turnover)



                                               OTC segment will witness the highest growth among other segments of the
                                               company. We expect it to grow by more than 50% over a period of next 4-5
                                               years. This would be a key growth driver for the company.

                                               Allopathic and Herbal-Nutraceutical market is expected to grow steadily
                                               between 20-25% over a next 5 years.

                                               Further due to its low margin, management intends to hive off CM/TM
                                               business over a period of time. Hence we estimate it to decline by 10% every
                                               year henceforth.

                                                                               Segment wise revenue break up
                                                                 Segment             FY06 15m FY07      CY08E                                     CY09E
                                                                 Herbal / Nutra    1540.0      2730.0   6530.0                                    7864.4
                                                                 growth (%)                                            42%        199%                    20%
                                                                 Allopathic                    640.0              1040.0         931.8             1071.6
                                                                 growth (%)                                            30%          12%                   15%
                                                                 CM/TM                         890.0              1370.0         986.4               887.8
                                                                 growth (%)                                            23%         -10%               -10%
                                                                 OTC                           210.0                  420.0      504.0               730.8
                                                                 growth (%)                                            60%          50%                   45%
                                                                 Total Revenues             3280.0              5560.0        8952.2 10554.6
                                                                 growth (%)                                            36%        101%                    18%
                                                               Source: SPA Research

                                               Overall the total revenues are expected to grow to Rs.8,952.2 mn. and
                                               10,554.6 mn. in CY08E and CY09E respectively from Rs.5,560 mn posted by
                                               the company for a 15-month ended period Dec‟07.
Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                                                                          Page 8 of 16
                                  Plethico Pharmaceuticals Ltd
                                             (PPL)
 Equity Research Desk             Initiating Coverage                                  25th June 2008

                              Operating profit has grown from Rs.997.1 mn. in FY06 to Rs.1,597.1 in 15m
       Profitability          Dec‟07, an annualized growth of 28% during the corresponding period net
                              profits has increased by 18% from Rs.961.3mn to Rs.1,418.8 mn.

                              Increasing foot-hold in the existing export and domestic market, synergies
                              with Natrol Inc., hiving-off low margin CM/TM business, Dubai capacity
                              enhancement and entering into high margin business will be the growth
                              drivers for PPL in the future. As a result we estimate operating profit to grow
                              by 50% in CY08E to Rs.1,921.4 mn and 52% in CY09E to Rs.2,333.1 mn. Net
                              profits are estimated to grow by 47% in CY08E to Rs.1,673.2 and by 20% in
                              CY09E Rs.2,007.6 mn.
Investment Concerns

   High focus on only nine         Presently the company‟s business is focused on nine main therapeutic
    therapeutic segment            areas. The company derives a substantial portion of its revenues from
                                   the sale of products in these therapeutic areas, namely, anti-malarials,
                                   anti-tuberculars, cough & cold, non-steroidal anti-inflammatory drugs,
                                   nutraceuticals, antibiotics, antibacterials and herbal products. Any
                                   change in the profit margin or increase in competition in this segment
                                   will adversely affect the financials of the company.


    Low Margin domestic            CM/TM business which accounted for 25% of the total turnover for 15-
      CM/TM business               month ended Dec‟07 has a low margin of 6%. As result adversely
                                   impacting the overall profitability of the company, further any increase in
                                   this business will further deteriorate the profitability of the company.


    High receivables days          Historically, due to long credit term in the CIS market, PPL is facing high
                                   collection period of 217 days. Resulting into a high working capital
                                   requirement and increase in short term liability of the company.


   Business similar to FMCG        Company is into an Herbal-Nutraceutical line of business which is similar
            sector                 to FMCG sector. One can expect huge competition and price wars in this
                                   market. Resulting into a low market share and less margin, hence long
                                   term high profit margin is not sustainable.




Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                 Page 9 of 16
                              Plethico Pharmaceuticals Ltd
                                         (PPL)
 Equity Research Desk         Initiating Coverage                                  25th June 2008

Industry
                           „Nutraceutical‟ is a broad term that includes foods, dietary supplements and
                           medical foods offering health/medical benefits, including the prevention
                           and/or treatment of disease. More generally, it can be defined as a food that
                           positively impacts an individual‟s health, physical performance or state of
                           mind.

                           The global Nutraceutical market comprises of two principal segments –
                           Dietary Supplements and Functional Foods. The global Nutraceutical market
                           is poised to grow at a CAGR of 6.1% during 2000-2010 and it sales are
                           expected to reach US$187.4 billion by 2010 against an estimated US$155.9
                           billion in 2007.

                           Global Pharmaceutical markets can be broadly divided into the regulated and
                           semi-regulated markets. North America, United Kingdom, Europe, Japan,
                           Australia and New Zealand constitute the regulated markets, while other
                           countries such as Asia, CIS countries, South America and Africa constitute
                           the semi-regulated markets. The regulated markets have more intellectual
                           property protection than the semi-regulated market. As a result regulated
                           market offers a premium for its patented products. Whereas semi-regulated
                           markets are characterised by low entry barriers and less stringent intellectual
                           property protection. As a result it is highly competitive and low margin
                           business.

                           Herbal medicine:
                           It is a form of traditional medicine and includes herbs, herbal materials,
                           herbal preparation and finished herbal products that contain as active
                           ingredients, parts of plants, or other plan materials, or combinations of it.
                           The global market for medicines currently stands at over US$60 billion
                           annually and is growing steadily.

                           Key findings by World Health Organization (WHO) on increasing
                           popularity of Herbal medicines globally

                           Alternative forms of medicine have traditionally been popular in most regions
                           of the developing world. According to WHO estimates:
                                a) In the US, 158 million of the adult population use complimentary
                                    medicines. According to the USA commission for alternative and
                                    complementary medicines, US$17 billion was spent on traditional
                                    remedies in 2000.
                                b) In Germany, 90%, of the population has used a natural remedy at
                                    some point in their life. Between 1995 and 2000, the number of
                                    doctors who had undergone special training in natural remedy
                                    medicine almost doubled to 10,800.
                                c) In the United Kingdom, annual expenditure on alternative medicines
                                    is US$230 million
                                d) In China, traditional herbal preparations account for 30% to 50% of
                                    the total medicinal consumption.
Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                           Page 10 of 16
                              Plethico Pharmaceuticals Ltd
                                         (PPL)
Equity Research Desk          Initiating Coverage                                25th June 2008

                               e) 70% of the population in Canada has used complementary medicine
                                  at least once.

                           Market dynamics

                           US, accounting for almost 50% of the global pharmaceutical demand, are
                           the largest market in the world. However, this geographic balance of the
                           pharmaceutical market is shifting away from the US toward the world‟s
                           emerging markets. The US market is forecasted to grow at 4-5% in 2007
                           compared to 6-7% in 2006. This lower growth rate is expected mainly due to
                           the large value of branded products losing its patent. Several key brands
                           valued at US$10 billion will lose patent in 2007, following US$19 billion
                           already lost in 2006, impacting the US market adversely.

                           In Europe, the top five markets (France, Germany, UK, Italy and Spain)
                           combined are forecast to grow 3-4% down from 4-5% expected in 2006.

                           The Japan market is forecasted to grow 5-6% in 2007, up from an estimated
                           1-2% in 2006 resulting from the government‟s biennial price cuts imposed
                           from April 2006.

                           Emerging markets currently represent 17% of the global market, but are
                           expected to contribute 30% of the growth in 2007.

                           China and India are expected to witness fastest growth in the Nutraceutical
                           market through 2015, largely due to their expanding economies and broader
                           access to medications. The Asia-Pacific region is forecasted to register the
                           fastest growth of about 6.6% during the period 2000-10, to garner sales
                           worth US$ 16.2 billion by 2010 from an estimated US$ 13.1 billion for 2007.




Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                         Page 11 of 16
                                Plethico Pharmaceuticals Ltd
                                           (PPL)
 Equity Research Desk          Initiating Coverage                                               25th June 2008


Investment Argument & Valuation
                            The stock is valued at 10.1x its TTM EPS of Rs.37.50 which in all means is
                            cheap compare to its peers, which are trading at higher double digit price
                            multiple. PPL is able to command higher margins due to its unique product
                            portfolio than its listed peers which are presence in kind of FMCG products.

                            For 15-month ended Dec‟07, EBIDTA and PAT margin were 28.9% and
                            22.7% respectively, way ahead of its peers which are trading in 17-19%
                            range at EBIDTA levels and 9-16% at PAT levels. At P/BV and EV/EBIDTA,
                            the stock is available at 2.4x and 9.5x respectively for the 15-month period
                            ending Dec‟07.

                                                          Peer companies valuation

                                                                 M-Cap                  EBIDTA              PAT   P/BV     P/E
                            Company Name            CMP (Rs.)    Rs. mn     Revenues    Margin    PAT      Margin (x)      (x)
                            Plethico Pharma Ltd.*      381.80    14,883.5     5,525.1    28.9%   1,418.8    22.7%   2.5    10.1
                            Dabur Pharma Ltd.           75.15    11,774.3     3,834.7    16.7%    239.8      9.3%   3.5    49.1
                            Emami Ltd.                 252.50    15,691.7     5,999.0    18.7%    927.5     15.5%   6.8    16.9
                            Zandu Pharma Ltd.        14,713.05   11,864.6     1,547.5    19.4%    164.1     11.6% 17.3     72.3
                            *CY07 (15m)
                            *P/E based on TTM EPS Source: SPA Research

                            At the CMP of Rs.381.80, the stock is available at 8.9x and 7.4x its fully
                            diluted earnings of Rs.42.92 & Rs.51.50 in CY08E & CY09E respectively. On
                            EV/EBIDTA basis, the stock is valued at 3.9x in CY08E and 2.7x in CY09E.
                            We initiate our coverage with “Buy” recommendation with 12-
                            month target price of Rs.475 based on average of DCF
                            (Rs.479/share) and target price multiple of 10x of CY08E earnings
                            (Rs.472/share), with potential upside of 25%.

                                                                                              15m
                            Key Fundamentals                       FY05         FY06         FY07       CY08E       CY09E
                            Revenue Growth (%)                      15%          44%          73%         61%         18%
                            Adjusted EPS (Rs.)                      73.9         28.2         41.6        42.9        51.5
                            EBIDTA Margin (%)                     29.8%        31.3%        28.9%       21.6%       22.3%
                            PAT Margin (%)                        25.3%        30.2%        22.7%       18.8%       19.1%
                            EV/EBIDTA (x)                           18.7         11.8          6.7         3.9         2.7
                            RoE                                     21%          22%          21%         16%         16%
                            RoCE                                    19%          19%          16%         16%         16%
                            P/E, x                                   5.2         13.5          9.2         8.9         7.4
                            P/Bv, x                                  1.1          2.9          2.2         1.4         1.2
                            Source: SPA Research




Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                           Page 12 of 16
                                         Plethico Pharmaceuticals Ltd
                                                    (PPL)
Equity Research Desk                    Initiating Coverage                                   25th June 2008

                                     Ratio Analysis

                                     We estimate operating profit margin (OPM) to be 21.6% and 22.3% in our
                                     review period CY08E and CY09E respectively. This low margin compare to
                                     last year is mainly due to the consolidation of Natrol Inc. which has lower
                                     margin (10-13%) comparing to the existing business of the company. Going
                                     forward the synergies of the acquisition will accrue to the company and
                                     hence we estimate higher margin in CY09E. This will impact the net profit
                                     margin concurrently, which we estimate to be 18.8% and 19.1% during the
                                     review period.

                                                                                           15m
                                      Key Ratios                   FY05        FY06       FY07      CY08E      CY09E
                                      OPM %                       29.8%       31.3%      28.9%      21.6%      22.3%
                                      NPM %                       25.3%       30.2%      22.7%      18.8%      19.1%
                                      ROE %                       21.4%       21.7%      21.1%      15.7%      15.7%
                                      ROCE %                      19.2%       19.4%      15.6%      15.7%      15.9%
                                      ROA %                       17.0%       17.9%      12.9%      14.4%      14.5%
                                      D/E x                          0.3         0.2        0.6        0.1        0.1
                                      Asset Turnover Ratio x         1.9         2.8        4.0        4.7        4.3
                                      Source: SPA Research

                                     Company has a low debt-equity ratio (less than 1x), we believe this as a
                                     positive factor since company is in expanding phase and looking for
                                     acquisition globally. Company has posted above 21% ROE since last three
                                     years which indicates healthy internal accruals, hence we do not see any
                                     financial crunch for PPL to fund its acquisitions. Asset Turnover ratio has also
                                     improved tremendously from 2.8x in FY06 to 4.0x during 15-month ended
                                     Dec‟07. Further, due to acquisition and increasing strong foot-hold in the
                                     export market, we estimate it to be 4.7x.

                                     Revenues have increased by 123% in the quarter ended Mar‟08 to Rs.2,404.5
    Recent Quarterly                 from Rs.1,080 mn in the corresponding previous year. Operating profits and net
      Performance                    profits has increased by 74% and 60% during March‟08 quarter. Company has
                                     consistently posted good quarterly numbers indicating its high growth phase
                                     and increasing demand for its Herbal-Nutraceutical products globally.




                                            YoY                  YoY                                   YoY
   Rs. Mn.                Mar-08    Mar-07 Growth Dec-07 Dec-06 Growth Sep-07                  Sep-06 Growth
   Gross Sales            2,404.5   1,080.0  123% 1,203.2 812.6    48% 1,233.5                 1,061.3   16%
   Operating Profits        516.9     297.5   74%   344.2 236.9    45%   545.2                   284.4   92%
   Net Profits              410.7     257.3   60%   299.8 197.3    52%   502.3                   258.9   94%
   Source: SPA Research




Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                      Page 13 of 16
                                   Plethico Pharmaceuticals Ltd
                                              (PPL)
Equity Research Desk               Initiating Coverage                                             25th June 2008



     Income Statement
     Rs. Mn.                           FY05           FY06       15m FY07               CY08E            CY09E

     Revenues                      2,217.9        3,187.0              5,525.1          8,895.6        10,486.0

     Inc/Dec in Stock                  8.8          (21.2)               (10.9)             -               -
     Raw Materials                 1,266.4        1,943.6              3,240.5          5,693.2         6,396.4
     Manufacturing Expenses           42.4           35.6                192.5            266.9           340.8
     Employment Costs                 98.0          127.7                241.1            533.7           681.6
     Administrative expenses          95.9           74.7                214.3            400.3           524.3
     Operating Expenditure            45.2           29.5                 50.6             80.1           209.7

     Operating Income                  661.2          997.1            1,597.1          1,921.4         2,333.1
     Other Income                       20.6           97.7                3.7              -               -

     Gross Profits                     681.8      1,094.8              1,589.9          1,921.4         2,333.1
     Finance and Interest Costs         37.2         59.7                 74.0             60.8            93.8
     Depreciation                       49.6         51.6                 67.3             99.3           126.0

     Profit Before Tax                 595.0          983.5            1,448.6          1,761.3         2,113.3
     Tax                                33.7           22.0               29.9             88.1           105.7

     Profit after Tax                  561.3          961.5            1,418.8          1,673.2         2,007.6
     Extraordinary items                 -              0.4              164.6              -               -

     Net Profit                        561.3          961.1            1,254.2          1,673.2         2,007.6

     Cash flow statement
     Rs. Mn.                                   FY05           FY06      15m FY07           CY08E        CY09E

     Cash flow from operations                  673          994              1,449          1,773        2,635
     Cash for working capital                  (385)      (1,127)              (903)        (1,239)      (1,126)
     Net operating cash flow- A                255         (239)               605            533        1,509

     Net purchase of fixed assets                (45)          (235)            (29)         (512)         (513)
     Net Purchase of investments                (349)          (131)         (2,541)          -             -
     Net cash flow from investing- B           (393)          (365)         (2,553)         (512)         (513)

     Proceeds from equity                       -          1,100                -             -             -
     Proceeds/Repayments from borrowings        153          269              2,880           110           155
     Dividend payments                          (22)         (93)              (122)         (114)         (114)
     Net cash flow from financing- C           131        1,276              2,758             (4)          41

     Net cash flow (A+B+C)                        (7)          672                809             17      1,037

     Opening Cash                                37             31              703         1,512         1,529
     Closing Cash                                31            703            1,512         1,529         2,566
Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                           Page 14 of 16
                               Plethico Pharmaceuticals Ltd
                                          (PPL)
Equity Research Desk           Initiating Coverage                          25th June 2008

     Balance Sheet
     Rs. Mn.                     FY05       FY06    15m FY07       CY08E        CY09E
     Sources of Funds

     Equity Share Capital        76.00      340.7       340.7       389.8        389.8
     Reserves & Surplus       2,547.40    4,097.3     5,589.9    10,271.5     12,365.9
     Net Worth               2,623.40    4,438.0     5,930.6    10,661.3     12,755.7

     Secured                   548.40      865.4        764.9       864.9      1,014.9
     Unsecured                 129.40       80.4      3,060.9       100.2        105.2
     Loan Funds               677.80      945.8      3,825.8       965.0      1,120.0

     Deffered Tax Liabilty       48.70       80.2      101.1        119.6          -

     Total Liability         3,301.20    5,383.8     9,857.4    11,626.4     13,875.7

     Application of Funds

     Gross Block              1,155.10    1,157.9     1,398.5     1,910.5      2,423.0
     Less: Depreciation         173.90      225.2       288.2       387.5        513.5
     Net Block                  981.20      932.7     1,110.3     1,523.0      1,909.5
     WIP                          4.40      236.1        24.0        25.0         25.0
     Net Fixed Assets         985.60     1,168.8     1,134.3     1,548.0      1,934.5

     Investments              1,251.10    1,382.5     4,088.7     4,088.7      4,088.7

     Current Assets
     Inventories                109.90      141.7       146.7       243.7        287.3
     Debtors                  1,120.40    2,227.4     2,659.3     3,655.7      4,309.3
     Cash and Bank               30.90      702.7     1,512.0     1,529.7      2,566.5
     Loans and Advances          36.00       68.1       569.3       901.7      1,091.7
     Other Current Assets          -          -           -           -            -

     Current Liabilities        127.60      172.0       206.7       341.2        402.2
     Provisions                  24.90       99.5       100.1         -            -
     Net Current Assets       1,144.70    2,868.5     4,580.5     5,989.7      7,852.5

     Misc Expnses                  -         65.1        72.4        -            -
     Total Assets            3,381.40    5,484.9     9,875.9    11,626.4     13,875.7




Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
 Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                 Page 15 of 16
                                                              Plethico Pharmaceuticals Ltd
                                                                         (PPL)
  Equity Research Desk                                        Initiating Coverage                                                          25th June 2008
Disclaimer: This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. SPA
Securities Limited (hereinafter referred as SPA) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely
for your information and should not be reproduced or redistributed to any other person in any form. This document is provided for assistance only and is not
intended to be and must not alone be taken as the basis for an investment decision. The intent of this document is not in recommendary nature. The views
expressed are those of analyst and the Company may or may not subscribe to all the views expressed therein The report is based upon information that we consider
reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. SPA or any of its affiliates or employees shall not be in any
way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Neither the Firm, not its
directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue
or lost profits that may arise from or in connection with the use of the information. SPA or any of its affiliates or employees do not provide, at any time, any express
or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a
particular purpose, and non-infringement.
The recipients of this report should rely on their own investigations. SPA and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in
the securities mentioned in this report. SPA has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as
endorsement of the views expressed in the report.

Disclosure of Interest Statement
1. Analyst ownership of the stock - No
2. Group/Directors ownership of the stock – No
3. Broking relationship with company covered - No

This information is subject to change without any prior notice. SPA reserves the right to make modifications and alternations to this statement as may be required
from time to time. Nevertheless, SPA is committed to providing independent and transparent recommendations to its clients, and would be happy to provide
information in response to specific client queries.


    Hitendra Gupta                            Research Analyst                                      hitendra.gupta@spasecurities.com

    Tarun Surana                              Research Analyst                                      tarun.surana@spasecurities.com

    Abhishek Kothari                          Research Analyst                                      abhishek.kothari@spasecurities.com
    For more information Visit us at www.spacapital.com
                                       Member NSE-Capital Market & Wholesale Debt Markets,SEBI Regn.no. INB231178238,F&O
    SPA SECURITIES LTD.                Market,SEBI Regn.no. INF231178238.Member BSE-Capital Market,SEBI Regn.no.INB011178234
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                                                                                MUMBAI
                   101, 10th Floor, Mittal court A-Wing, Nariman Point, Mumbai 400021. Tel: (022) 22801240-49; 40439000 Fax: (022) 22846318
                                                                          NEW DELHI
                        25, C-Block Community Centre, Janak Puri, New Delhi - 110 058 Tel: (011) 25517371, 25515086, Fax: (011) 25532644
                                          B- 1A- 132, Sector-51, Noida - 201301 Ph: 0120 - 4241222-26 Fax: 0120 - 4241227
                                      409, Qutab Plaza, DLF City, Phase- I, Gurgaon Ph: 0124 - 4380090-94 Fax: 0124 - 4380089

                                                                                KOLKATA
                 Diamond Chambers, Room no. 8-O, 8th Floor, 4 Chowringhee Lane, Kolkata - 700016 Tel: (033) - 22521537 Fax: (033) - 22521540

                                                                          BANGALORE
                    703 & 704, 7th Floor, Brigade Tower, 135, Brigade Road, Corporation Division no. 61, Bangalore - 560025 Ph: 080 - 41148395
                                                                                 JAIPUR
                               UL-15, Amber Tower, Sansar Chand Road, Jaipur - 302001. Tel: (0141) 5107044/5107144 Fax: 5107144
                                                                            CHENNAI
                     3H, 3rd floor, East Coast Chambers, 92/34, G.N.Chetty, T. Nagar, Chennai - 600014 Tel: (044) 52071380-82 Fax: 52071379

                                                                              AHMEDABAD
                           407, Anand Mangal Complex - I, Behind Omkar House, C.G.Road, Navrangpura, Ahmedabad Tel: (079) 32998056
    D i s c l a i m e r: The information contained in this report is obtained from reliable sources and is directed at institutional investors. In no circumstances
    should it be considered as an offer to sell/buy or, a solicitation of any offer to, buy or sell the securities or commodities mentioned in this report. No
    representation is made that the transactions undertaken based on the information contained in this report will be profitable, or that they will not result in
    losses. SPA and/or its representatives will not be liable for the recipients‟ investment decision based on this report.




 Inst. Dealing Desk: 101,10thFloor,Mittal Court A-Wing,Nariman Point,Mumbai – 400 021
  Tel. No. : 022-40439000, Fax No. 22871192/22846318 Email: cms@spacapital.com
                                                                                                                                                       Page 16 of 16

				
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