Aarti Drugs


(Subash Nayak) #1

Introduction:-

  • Established in 1984. Part of the USD 265 million Aarti Group of Industries
  • Produces Vitamins, Anti-arthritis, Anti-fungal, Antibiotics, ACE inhibitors, besides its range in , anti-diabetic, anti-cholinergic, sedatives and anti-depressant drugs.
  • Strong presence in the Anti-diarrhea, Anti-inflammatory therapeutic groups
  • It has total eight plants at two locations. One is in Tarapur in Maharashtra and the other is at Sarigam in Gujarat

From Screener.in

  • Stock is trading at 1.06 times its book value
  • Company is expected to give good quarter
  • Company has been maintaining a healthy dividend payout of 25.55%

Quarterly Results:-

Narration Sep 11 Dec 11 Mar 12 Jun 12 Sep 12
Quarter 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr
Sales 144.50 155.09 198.18 189.92 216.34
Operating Profit 15.38 17.13 25.76 25.90 29.57
Other Income 0.02 0.03 0.00 0.00 0.00
EBIDT 15.40 17.16 25.76 25.90 29.57
Interest 4.40 5.74 6.50 6.51 6.60
Depreciation 4.48 4.68 5.44 6.32 6.40
Tax 1.59 1.93 4.54 4.19 4.95
Net profit 4.93 4.81 8.42 8.88 11.62

Conclusion:-

  • Sale growth for last 1 yr @32%, Profit growth @61%
  • Company seems to have entered a high growth phase.
  • Assuming this company can make same EPS of 7.33 for next 4 quarters (0 growth assumption) and at a PE of 9. Price should reach at around 261, which is a cool 40% gain in a year or so.
  • Limited downside at CMP of 176.

Disc:

  • Has taken a small position (at around 2% of my portfolio) yesterday. Planning to add more in a staggered manner

Reference:-


(Sunil Bakshi) #2

Interesting find, Subash.

looks like good value. The only problem is not so good track record of company in giving shareholder returns for the last 7-8 years. the share price performance has been mediocre. What is the trigger of growth in the last 2-3 quarters and is that sustainable? If yes, this could be a multibagger.


(Hitesh Patel) #3

fy 12 debt at consolidated levels was around 270 levels. debt has gone further to 298 crores for half year ended sep 12.

for a company with market cap of 223 crores it seems a bit higher.

interest payment for h1 fy 13 has increased to 13.11 crores as compared to 8.4 crores.

Otherwise growth is scorching with company having more than doubled its net profits from 9.54 to 20 crores.

Barring debt issue the company looks okay. I somehow dont understand these companies paying out fat dividends instead of focusing on reducing debt.


(Subash Nayak) #4

Hi Sunil,

I agree with the fact that this company doesn’t have a good track record of growth for last 6-7 years, neither has an excellent track record of ROE, ROCE. Higher debt level is another issue here.

Having said that, with recent good growth, we can expect it to give decent return in medium term. Possible interest rate reduction by RBI may give further boost to it. This is kind of stock which perfectly fits to Yuvraj singh’s add dialogue, “Jab tak balla chal raha hai tab tak thhat hai”. Need to constantly monitor the margin, debt, and slowdown of growth for this company. Hence can’t put it into one’s core protfolio (like Mayur, Kaveri, Ajanta).

My approach is to add in a staggered manner, with constant monitoring for deterioration in any of these observable.

Hitesh Bhai,

I hadn’t given much look into debt side. The DE ratio of ADL has been in and around 1.5 for last 5 years. I haven’t looked into the dividend-debt combination angle too, seems strange to me also.

Btw, have you look at ADL’s parent Aarti Industries, which is into chemical industry and is giving similar price movement as of ADL.


(Ayush Mittal) #5

Hi,

I also feel the results are fantastic and a quick look at the co’s past results shows that the co has just started growing rapidly over last couple of years. It may be a turning point for the co.

Haven’t been able to give time due to several other pre-occupations. Would be great if we can do some detailed work here.

Ayush


(Hardtoget) #6

came across this, remember Hitesh Bhai,mentioning in another post that it willonlyeffect companies catering toIndianmarkets,

this one para draws immediate attention

“A preliminary working shows that prices of many leading brands will be slashed by 50% to 80%. This will reduce industry profit by half to Rs 4,000 crore on domestic sale of Rs 67,500 crore,” Indian Pharmaceutical Alliance (IPA) Secretary General DG Shah had said.


(Hitesh Patel) #7

hardtoget,

the main point here is about essential drugs.

Products in the segments like dermatology, ophthalmology etc will not be classified in essential category and hence I think companies like ajanta will have minimal impact.


(ranvir dehal) #8

Looks like a very interesting company with a descent track record. Looking at the bigger picture, Indian Pharmaceutical industry today is what IT industry was 15 yrs ago. The rest is history…as India became the hub of IT outsourcing enriching the shareholders along with it. A similar case can be made for Indian Pharma industry with its unique advantages like-highly educated English speaking workforce, cheaplabor, weak currency, strong and experiencedentrepreneurship. As these factors play out, descent looking Indian pharma companies today will be the outsourcing and manufacturing hub of the world in future.


(ranvir dehal) #9

Even Aarti Industries looks very interesting to me on the following accounts-

1). Super diversified product portfolio.

2). Avg RONW of 16% in the last 5 yrs.

3). High dividend payout.

4). Resonable valuations.

5). Presence in high growth sectors as they makeintermediaries andspecialty chemicalsfor agrochemicals,paints, additives, polymers, APIs, health andhygiene products and a number of other industries.

6). Increasing percentage of exports to their overall revenue mix( now at over 50% against 43% last year)which will help improve margins going forward.

7). Ethical and honest management.


(ranvir dehal) #10

A few more points to consider wrt Aarti industries-

1). Fully integrated operations.

2). Expected to double its hydrogenation capacity to 3000 tpm by year end fy13 which will further boost revenues and profitability.

3). The company is almost a zero affluent discharge company as it converts almost all waste products intocommerciallyviable chemicals.

4). Also has captive power plant( though not a big one).

5). Conservative accounting policies.( look at the amount of depreciation they are charging)

6). More than nice dividend payout inspite of over 35% general public shareholding.

7). The API and CRAMS business of the company achieved breakeven in fy 11-12 and is poised for greater growth going forward.

8). Share of high marginspecialty chemicals is steadily increasing which will be reflected in margins goinng forward.


(aware) #11

Ranvir has made a very interesting statement above. .** " Looking at the bigger picture, Indian Pharmaceutical industry today is what IT industry was 15 yrs ago."

**

Indeed several indian pharma companies seem to be well placed and go long way .

Experts in Pharma (** Hitesh**) and others , Can you put your thoughts on this?**
**


(aware) #12

Ranvir,

May be you can start a diferent thread on this topic.


(ranvir dehal) #13

As per the disclosures under Reg. 13(6) of SEBI, the whole time directors of the company have been buying shares in the companycontinuously for the past 2 months or so, which is a very good indication of where the company is heading in future.


(Nooresh) #14

Hi,

My take is company will improve corporate governance and go for placement or stake sale in next couple of years to monetize their holding or increase market cap and dividends.

Recently aarti Inds merged a group co anushakti chemicals doing 24 cr pat at a valuation of 190 crores which is a fair one.

Promoters increasing stake. Balance sheet of Aarti had small equity holdings for 6 yrs and now its sold last year. Even though its a fractional amount but it shows somebody has started looking at the balance sheet from a shareholder perspective.

Recent analyst meets, conference calls and PR all add up to investor friendly exercises. Though some may find it manipulative to rig up prices :stuck_out_tongue:

There is a lot of value in both the stocks if management comes clean and shows profits because my take is they were siphoning off before :slight_smile:

Disclosure: Have a good exposure to Aarti Inds so maybe biased.


(ranvir dehal) #15

Hi Nooresh…

I’ve also gone through their recent conference calls…the management sounds quite bullish and the business prospects also look quite bright from all angles.

Just one question for you…what makes u believe that they were siphoning off the profits earlier??? I could not home onto any thing like that. May be I am missing something…


(Nooresh) #16

Anushakti Chemicals a group company in similar lines of business. After so many years in the industry why has the growth been so low ? whereas many other companies have done superbly


(ranvir dehal) #17

Hi Nooresh,

Thats true but that doesn’t mean that they were siphoning off profits earlier. On the contrary both aarti drugs and aarti industries have been paying hefty dividends even when the promoter holding in both the companies is around 55 to 59% and the general public shareholdings in both the companies is in excess of 35%.

Also, aarti industries has appreciated 20 times in the last 10 yrs(excluding dividends) while aarti drugs has appreciated more than 12 times in the last 10 yrs. Not bad by anystretchof imagination. Basically both of them have created more than descent value for share holders.

And now with both companies on expansion spree I am expecting good times ahead.

Also, the promoters have now started buying shares form open market which is another positive for both these stocks.


(ranvir dehal) #18

Some more positives for aarti industries include-

1.Manufacturing facilities for the Performance Chemicals and Agri-Intermediates & Fertilizers arecommon and overlapping. They have a flexibility to switch the product line based on marketdemand and prevailing product margins. This helps the company optimize their resources and also insulates themfrom the adversity of the specific market conditions.

2). Share of exports hassignificantlyincreased to 50% of total revenues as against 42% in the last year.

3). Captive hydrogen gas plant is expected to be operational by q3 FY13.( Basically backward integration which will help boost margins)


(Subash Nayak) #19

Awesome result from this unsung pharma api player. YOY growth figure : http://www.moneycontrol.com/livefeed_pdf/Feb2013/Aarti_Drugs_Ltd_060213_Rst.pdf

Sales up 28.38%

EBITDA up 133.5%

NP up 127.44%

Promoter shareholding up to 57.15% vs 54.83% years ago

Cursing myself, for having just 1% of my portfolio in Aarti drugs :frowning:


(Nooresh) #20

Excellent results but i still believe the best in terms of results is yet to be seen.

Both the companies may surprise with further dividends.

For people who are looking at the 10 year record also look at the stock price in 2005-2006 to 2012. Many funds got stuck in that period at the highest price.

With promoters increasing stake would like to add the positions if Aarti Inds comes to 90-80 and drugs if comes to 180-200