ValuePickr Forum

BDH Industries: Will this small formulator improve health of investor's wealth?

Background
BDH, set up in 1990, manufactures pharmaceutical formulations. Mr S C Kachhara, the Joint Managing Director, managing operations. Products include formulations for anticancer, antifungal, anti-malarial, and other treatment, in the form of tablets, capsules, injectables, and external preparations. Promoters hold around 55.4% stake in the company as on March 31 2018.

Business:
The company work as formulator for various pharmaceutical formulators. It supplies formualtors to various domestic large pharmaceutical companies and also work as contract manufacturer for Rest of World market (Non-regulated market excluding developed market like US/EU/UK). Over the period, the company had focus on improving margin which resulted in almost 10 fold jump in profit over decade with just doubling of turnover over same period. As per Crisil Rating rationale, IPCA account for 35% of revenue.

The company is recognized star export house. It has one formulation facility which has ISO certification and approved by WHO. As per discussion in AGM, the company is already utlising peak capacity in Kandivali unit.

Power business

The company has also spent around Rs 8 Cr on setting up two wind turbine of 0.8 MW each at Jaisalmer District in Rajasthan. The project was envisaged to provide IRR of around 14-15% with assumption of PPA at around Rs 5.50-6 per unit along with Tax benefit. However, there were some issue about PPA pricing and hence company is not able to generate any cash flow despite major capex. The management is currently exploring alternatives to utilise these assets productively. However, given the decline in tariff revenue, the power capex is unlikely to result in any significant profit for the company in my opinion.

Agro products

The company is also entered into agro products business. The planatations of cashew, mango and cocoanut grafts has been completed. The warehouse at Kudal, Sindhudurg district would be required after of couple of years when the crops would ready for harvesting. Hence, the company has been leasing out warehousing facility which is reported in lease rental in FY18 P&L account.

Financial analysis

Despite small size, the company has managed to improved profitability and cash flow over a period.

The increased profit and positive cash flow assisted company to constantly improve dividend payment over decade which increased from nil in FY09 to Rs 2.25 per share during FY18 (almost 35% payout ratio).

Screener data for last 10 years:

https://www.screener.in/company/524828/

Credit rating rationale:

https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/BDH_Industries_Limited_December_12_2017_RR.html

Future prospects

In the AGM held of Sep 25 2018, the management was asked to explain growth prospect and utilisation of cash and equivalent on balance sheet. The management said that they are considering capex of around Rs 100 Cr after 2-3 years. The current cashinvestment of around Rs 17 Cr (Net cash of Rs 10 Cr after adjusting Rs 7 Cr of working capital facility). The company intends to accumulate around Rs 25 Cr (from internal cash flow over next 2 years) and then would look at capex of around Rs 100 Cr. They are started searching for suitable location and would announce capex at appropriate time.

Till new facility is operational, the company would continue to operate from Kandivali Facility. However, there is limited scope for volume growth from Kandivali facility as same has reached peak capacity utilisation. Hence, for next 2-3 years, the revenue growth would be more from price growth and improving product mix.

Positives:

Moderate valuation: The company is trading at PE in single digit. Further, the management has been sharing cashflow with minority shareholder by way of distribution of dividend (payout ratio more than 30% over last 8 years).

Lower gearing: The management has managed well the growth in profit by prudent utilisation of existing facility and not allowed debt equity ratio to increase. Further, even for future planned capex, the management indicated that debt equity ratio would not exceed more than 1 times despite the capex.

Negatives:

Limited growth potential: Given that current capacity is fully utilised and past attempts of company in power and agro products are yet to contribute meaningfully to bottom-line, the growth would be primarily driven by superior product mix and price inflation. There is very limited scope for volume growth for the company till it start new facility.

Small size: The company is very small to undertake capex to move into bulk drugs as well as Developed market. The company intends to operate in Rest of World segment which is highly competitive. Further, as per Crisil Rating press release, the company has high dependence on Ipca with almost 35% sales. That would be major risk factor and would also limit margin expansion for the company in medium term.

Poor capital allocation: The recent capex in Power business (almost 8 Cr of Total Gross block Rs 35 Cr as on March 31 2018) has not resulted desired return. Further, the efforts in agro products would also yet to yield any meaningful contribution.

Catch 22 problem: The future capex of Rs 100 Cr (capex needed for new facility of minimum economy size) also appear very large in context to current operation and cashflows. Even after 25-30 Cr accumulation cash over next 2-3 years from internal generation, the balance Rs 70 Cr debt for capex may result in additional interest outflow of Rs 7 Cr (resulting cash loss at current cash profit of Rs 4.5 Cr during FY18). Hence, the company is facing major issue with growth. while growth would not come without capex, minimum capex of Rs 100 Cr has would put different set of challge on debt serivicability and cashflow given the small size.

Disclosure: I have very small tracking position in the company. The investor shall do its own due diligence before making any decision. I have attended AGM of the company and there is scope for miscommunication at my side in AGM. Investor shall take note of that limitation.

9 Likes

Quick look in screener’s cons has “Company Might be capitalizing the interest cost”.

Looking at AR till march 2017 states total borrowings around 8.37 cr. While the interest expense (or bank charges as they mentioned it) is only 35 Lakhs. Around 4% interest rate.

@dd1474 any take on this?

Interest Expenses:

1 Like

The company has nearly 50% business in exports due to which it get working capital loan at low concessional rate. Hence, 4% interest rate is not unusal. This is my opinion and may be wrong.

Find enclosed link to RBI circular providing indicative cost of packing credit for Indian exporters.
https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?Id=8132&Mode=0#7

2 Likes

A big story here was the land bank in Kandivli (worth more than the MCAP). Any idea how they plan to monetize it.

found this in comments section in a blog posted in a site…not confirmed
Realty story of BDH:BDH stands out for Bombay Drug House. Company’s plant is located on 2.7 lac sq ft at Kandivali east adjoining to Big Bazaar in the prime location of Kandivali.The FSI there is 2 which give saleable area of 5.4 lac sq ft on which 30% loading is permissible and feasible. Thus total saleable area works out to 7 lac sq ft and the existing market rate is Rs 5000 per sq ft. BDH has a manufacturing are spread over 42,500 square feet though the entire space is 270,000 sq ft.Co owns land and development cost is estimated at Rs 2000 per sq ft which leaves post tax profit ( 30% assumed) of Rs 2100 per sq ft.The clear tax free profit could be Rs 147 Crore on equity of Rs 6 Crores offering earnings of Rs 240 per share.Shifting cost is not in excess of Rs 15 Crore which hardly matters.Rumuors are that one of the leading Mumbai Builders has approached the co with a outright sell of the said land for Rs 125 Crore which was refused by the co.Since the property is adjacent to Big Bazzar, chances of Pantaloon or RIL stepping in is not ruled out.So if it vindicates all these then BDH is all set to make history in the bourses.Again the same has been there for eternity now and yet nothing has happened.It may so happen that nothing happens in the next decade too.

I couldn’t find any reference to the land area they hold in AR. Can you please provide any reliable source for the same?

Thank you for the link. Didn’t knew about the working capital loans like these.

1 Like

While it is true that the plant is located next to Grauer and Weil mall (Growel 101) which has decent performance of operation for decade, I do not see one can build investment case on asset sale. Given that management has demonstrated record of sharing wealth and cashflow with minority shareholder (if past record is anything to go by), in any such event of sale of land and plant, the shareholder may expect cash return by buyback or dividend. However, if management decide to use that cash for future expansion, then it is different story. The probability of such event is low as Kandivali is only operational plant and hence management can not sale plant, wait for 2-3 years for new capacity to built up and then continue the business.

In my opinion, one shall look at formualtor business as going concern and evaluate whether to invest or not. Any event like sales of land at Kandivali may provide onetime gain and point to re-evaluate investment thesis. Since neither value nor time is known at this juncture, I would not like to built case of land sale in equity investment.

Thanks for highlighting critical aspect about strategic location of plant.

1 Like

No reliable source. I found the posts here

1 Like

I’m assuming that you attended the AGM and if I’m correct, it was conducted in their Kandivali premises. Considering the piece about the company’s landbank, they should have enough space within the same campus to do some bit of capacity expansion(plant area 42.5k sq ft and total land area of 270k sq ft.). Why isn’t the company exploring that option. This way they can do the expansion gradually without needing any debt(internal reserves of 10 cr).
Regarding the Agro products business, did they mention anything about the scale of plantation?
I first read about this in their 2016 Annual report, but couldn’t find much details on it.

Disc: Invested

While searching on Net, I come across a negative news about BDH Industries (canellation of Maharashtra FDA approval to plant in 2016) which I thought to share on forum. I have not checked authenticy and reason and further develpoment in the case. The Company is WHO certified and Maharashtra FDA approval now so the issues might have been resolved. Nevertheless, it is worth to take into account this adverse news before making any decision.

http://www.pharmabiz.com/NewsDetails.aspx?aid=101186&sid=1

The investor please take note of this adverse news before making any investment.

1 Like

Porinju exited this stock i believe. Also, low liquidity stock. Interesting thing is not matter what market situation is, it will not fall much or will be back to normal soon. This stock remained stable even in bull as well as bear market. But from growth perspective, i wont see any edge for this.

Note: My overall price actition observation only, never did in depth analysis.

how can we trust the management who does fraud and cant trust their intention…no where in report it is said that it was mistake.

1 Like

Appreciate your valid concern. However, find enclosed lnk from Maharashtra FDA website with certificate given to the company. While I do not any update, but given that after Maharashtra FDA re-approve the plant after cancelling the license, there might be some development which we are not aware.

Having said that, in the context of Maharashtra FDA issue, the concern are valid and one shall definitely put more efforts before investing in the company for sure.

1 Like

i agree that they have got licence from FDA again, but FDA can certify the plant but when they can go to this extent who will certify the intention and honesty of management.
thats point to keep in mind

disclosure… i am not holding any shares neither i am intersted in investing in this co…

The company has been paying dividend consistently since 2011 and the dividend growth rate has been a healthy 24%. Even if I take half of this rate as the growth rate for dividend going forward and Discount rate of 15%, then based on dividend discount model,taking the conservative case, the value of the stock comes at 75.
For a company generating consistent cash flows although with low growth with currency headwinds in its favour, single digit multiple is definitely not expected.
I feel post this quarter result, which are expected to be quite good, market would certainly give this one better multiple.

Decent Q2 results from BDH, topline grew by 3% and bottomline grew by 20% on YoY basis. Expected better growth for topline but margin improvement is certainly a positive.
Post results, the PE on ttm basis is just 8.7 which does look pretty cheap.

I think inventories are up by about 2 crores over 31 March numbers … even YOY they are up by 2.5 crores…I think post september sales pick up for pharma formulations .The second half sales are generally more for BDH… one can expect 10 EPS…for this year

Cash flow is negative for past 3 years.

That’s coz of the capex into windmill and warehouse. Look at their operating cash flows

Even their FY19 operating cashflow is negetive. They seem to have completed capex in FY18 but no corresponding increase in revenue/sales in FY19. In fact, it has decreased in last FY. Huge increase working capital, why? usually, such increase in working capital, receivables and payable is sign of trouble.

I am not saying this company is dud, but investing in such microcap involves much more work than dividend calculation and cash flow analysis. Better to be safe than sorry!