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Tuesday, August 19, 2008

Elder Pharma - attractive stock pick for investors

Elder Pharma is an attractive pick for investors wanting to capture growth in this defensive sector

A ROBUST healthcare sector has accelerated the growth of fast moving health goods (FMHG) in India. And Elder Pharma, which has an eclectic bunch of offerings, is cashing in on the good times. The company has just the right mix of drug formulations, FMHG and active pharma ingredients (APIs) and is an attractive pick for investors who want to capture growth in the defensive sector.

BUSINESS:
Elder Pharma commenced operations in 1988, and is engaged in manufacture of drug formulations in the therapeutic areas of woman healthcare, wound management and nutraceuticals. It also manufactures APIs and generic drugs in small quantities. Elder Pharma is a mid-sized player which follows the non-infringing business model of either in-licensing products of innovator companies or manufacturing off-patented drugs. It has entered into marketing and manufacturing alliances with 28 international companies to launch their research-based products in India. It has been successful in building its brands in niche categories. Elder Pharma is the market leader in calcium supplements, wound healing and injectable B12 vitamin. The company’s top five brands contribute 44% to its total sales. Over 95% of its revenues are generated from the domestic market.

GROWTH STRATEGY:
The company plans to grow organically, as well as inorganically. While it is aggressively marketing its existing products to new markets, it is also enlarging its presence in more therapeutic areas by launching new products. In August ’07, Elder Pharma acquired 20% in UKbased NeutraHealth for around Rs 47 crore, giving it access to the latter’s multiple brands. The company is also completing the acquisition of Bulgaria-based Biomeda, which will enable it to increase its revenues by Rs 60-70 crore in FY09, and around Rs 120 crore per year thereafter. Elder Pharma has recently added new manufacturing facilities and plans to commission new units. It is also focusing on contract manufacturing, primarily through its alliance partners. Exports currently account for just 4-5% of its total revenues. The company plans to ramp up its exports by targeting semi-regulated markets. It also aims to enhance the share of APIs in its total turnover to 20% by FY10, from 8% currently.

FINANCIALS:
Over the past five fiscal years, the company has posted a CAGR of 20% in revenue, which stood at Rs 548.1 crore in FY08. Likewise, its net profit has witnessed a CAGR of 54.3% during the same period to Rs 71.8 crore for FY08. The company’s profit margins have been adversely affected since the past three quarters due to higher interest and raw materials costs, and expenditure involved in launching new products. Elder Pharma intends to incur capex of Rs 40 crore in FY09, against Rs 60 crore in FY08. It has an average dividend payout of 19% (average of the past five years). The company expects to maintain its payouts at 20-25% of its profits in future.

VALUATIONS:
Elder Pharma trades at an EPS of Rs 39.5. On the back of its capacity expansion, increased product profile and expanding global footprint, it plans to grow 30% y-o-y to achieve a turnover of Rs 1,000 crore by ’10. Considering estimated earnings for FY09 and FY10, the company is currently trading at forward P/Es of 7.3 and 5.9, respectively.

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