Fulford India (FIL)-Research Report

Report Date: July 28, 2008.
Company Name: Fulford India (FIL)
Recommendation: BUY
CMP – Rs. 445/-
Target Price – Rs.600/-
Mkt. Cap. Rs. 174 crore

Investment Rationale
Ø FIL, 54% subsidiary of Schering Plough – USA, has reported subdued performance for Q2 CY 2008. Net sales grew @ 10% to Rs.51.54 crore. There has been decline in OPM% to 18% (23.7%) with sharp increase in raw material costs. As company imports major portion of its raw materials (~83%), weakening of the rupee has impacted input costs adversely. Moreover, there has been increase in input costs as China has closed down many of its chemical units for environment reasons. Company is unable to pass on raw material cost increase to its customers as existing price control laws limit companies from increasing prices of drug beyond 10% in 12 months. Staff cost has also increased with increase in its sales force to ramp up operations. Consequently, PBT
declined by 10.8% to Rs.10.82 crore and PAT declined by 10.1% to Rs.7.07 crore.

Ø During H1 CY08, Net sales were up by 7.6% to Rs.82.91 crore. OPM% declined to 10.7%. Consequently, PAT was lower at Rs.7.47 crore.

Ø FIL is present in therapeutic segments of Dermatology, Allergy & Respiratory, Anti-infective, Hepatitis, Rheumatology, Onclology and Cardiovascular. Company continues to explore all opportunities to strengthen existing product portfolio either thru own (parent’s) R&D pipeline or thru in-licensing options of non-Schering Plough products to extend the product range. During CY07, company launched two new products Alaspan Syrup and Alaspan AM. Both these new launches have been well received. Company is planning to launch two new products in CY 2008 – Feracrylum (wound healing agent) and Elocon (dermatology).

Ø Company is in process of developing strategic plans covering investment in growth and expansion. FIL aims to drive top-line growth aggressively thru new product launches, investing in brand building and growing existing products aggressively. It is also strengthening its sales & marketing team. All these efforts will call for investment and company has surplus cash (Rs 83 crore on Dec 31, 2007) which can be used for this purpose.

Ø Schering Plough Corp. has acquired Organon Bio-science and Organon has good presence in India thru its unlisted fully owned subsidiary– Organon (India). It is similar in size as Fulford India and has products for women’s health, etc. FIL is looking at opportunities for synergies of operations between these two companies.

Ø Parent company had upped its holding in FIL from 40% to 53.93%. Increasing commitment of the parent is indicative of likely larger involvement of Fulford India in global scheme of things.

Ø Indian pharma industry has been growing @ CAGR of 12% (+) in last 2-3 years. Going forward, prospects of the industry is good in view of increasing levels of income of people who then pursue better healthcare products and services, better access to healthcare facilities and Private insurance companies offering medical reimbursement products. Moreover, drug industry has submitted a proposal to the government to reverse the cap on price hike
for drugs outside price control from 10% to earlier 20%. Government is considering liberalizing this 10% mandatory cap on price hike. If the cap is liberalized, margins of pharma companies will improve.

Ø FIL’s top-line will grow at CAGR of ~14% p.a. over next few years with launch of new products and operating leverage will help to improve profitability.

Ø Fulford is a cash rich company with surplus cash on hand @ Rs. 200/- (+) per share. At CMP, the share is trading at 8 times CY 2008 expected EPS of Rs. 55.9 and 6.5 times CY 2009 expected EPS of Rs. 68.2/-. Long term prospects of the company appear bright. We recommend to “BUY” at CMP.

Source: Geojit Members Research Desk