trading at trailing PE of above 50. however good the story might be no margin of safety. always want to invest but cant
There was zero reaction to the stock split news announced today. usually, such liquidity driven news is generally perceived positive by the market but I guess, people are on the wait mode here for the biggie - FDA approval news
- Imagine with US FDA approval for API plants, PAT multiplies.
- The FD plant - has been approved by Mexico, has been inspected by UK and Brazil. Imagine with US FDA approval too, with drugs going off-patent and with FTF opportunities, PAT increases multifolds as well.
- opportunities in japan crams business, Anti Retro-Virals opportunity, ICE JV.
It can probably be said with conservative estimation that PAT will be 10 times the present value in 5 years. So, the present 50 P/E becomes 5 P/E and so, for the co. to quote at 30 P/E, it still has scope to grow 6x from CMP in 5 yrs.
Let’s check the performance of last 7 yrs -
Sales => 95.8 cr in FY08 to 623.4cr now => CAGR =30.7%
PAT => 11.32 cr to 73 cr. => CAGR = 30.5%
So the company has good track record as well.
There is too much imagination. While I am also invested in Shilpa recently, sta has expressed valid concern on valuation. Appreciate your efforts to get past record, but please note that even in past data, we did not get any impact of operating leverage (sales and net profit growing at same CAGR so no improvement in margin).
Hence, let us wait for story in my view.
Agree Dhiraj. FD’s have higher margins than APIs though and so, after FD sales start, it should improve the overall operating margins.
Disclosure: Not invested but biased because I am likely suffering from envy
@vicky_7900 The above analysis should be done with EPS growth and not PAT growth. That because what a share owner gets is earnings per share (or PAT per share) and not PAT per se.
The company diluted its equity during the period of your analysis by 2.22 times. In other words, in March 2008 there were 17,357,350 shares outstanding and as on date there are 38,550,952 shares, all of the same face value. However it also issued a bonus. in 2:1, of 12,262,082. So profits that grew from 11.32 cr to 73 cr in that periods was actually attributable to 1.51 times as many hands as there were in March 2008.
Adjusting for the dilution growth is 23.8%. But we should add distributed dividends during this period, which adds to 7.9. So a share owner in March 2008 has effectively seen his earnings grow by 28.2% and not 30.5% as mentioned above.
Your point would be valid if the money obtained through dilution was used in the getting to current revenue(or PAT) levels from 2008 revenue(or PAT) levels.
But if the money obtained through dilution was spent in building base for future opportunities (profits from which is not realized yet obviously) i.e. FD plants, Developing new APIs, new crams business. ICE JV etc, then analysis with PAT growth is more appropriate than analysis with EPS growth. I am sure you will see the reasoning in this one.
And ofcourse, the 50 P/E I’ve taken is based on current outstanding shares. If you use the number of outstanding shares in 2008 to calculate current P/E, it would have been probably 30-35 range.
If equity capital has been raised ‘just now’ for future opportunities which reflects in current books, you are indeed right. But about 6 million of the roughly 7.2 million shares (pre-bonus count), or ~ 80%, was issued between 6 and 3 years ago. So to not take them into account would be a tad too optimistic in my view.
So if an NBFC has raised capital diluting in the March 2015 quarter by 20%, then say the EPS growth may not be reflective. But 3 - 6 years is a long period especially for those who want to have a conservative bias to accommodate either errors or their lack of knowledge of the business.
If the money was raised ‘just now’, the new FD plant for ex. ( which has been approved by Mexico n has been inspected by UK ,Brazil ) would have been in the present state not before 5 yrs in future.
EDIT: also, if in future, co. plans for money raising for more expansion (say an additional API or FD plant), it will at much better valuation than done in the past. So future equity dilution (in %age terms), if any, will be much less compared to the past.
Any further on news release by the company?
Shilpa Medicare FY15 Annual Report is now available at http://www.bseindia.com/bseplus/AnnualReport/530549/5305490315.pdf
Some interesting points in the AR based on preliminary review:
- API facility at Raichur and Formulations facility at Jadcherla have received approval from Mexico, Brazil and EU authorities. USFDA approval for both is still pending (both plants have been inspected by USFDA in FY15)
- Anticipating an increase in demand in the current year – so oncology formulation and API manufacturing facilities for few products have been expanded significantly
- Significant capacity expansion showing in CWIP which has doubled from 110 crores in FY14 to 220 crores in FY15
- R&D spend is 28 crores for FY15, 4%+ of sales and 30%+ of net profit. R&D is yielding encouraging results – projects of 5 products transfer executed successfully; other projects of 8 products have been completed and ready for transfer to plant;
- 10 new molecules have been taken up for development considering future demand
- 4 DMFs filed in US have been applied for in EU-CP, EU-DCP, EDQM-CEP, Health Canada, New Zealand, and Australia
- 11 International Patent Applications (PCT) were received, and 15 Indian patents in FY15; So total number of patents now more than 115+ (100 in FY14 AR)
Anyone attended Shilpa AGM yesterday ? please do share the insights from the meeting.
Thanks & Regards,
Any updates from the AGM last week ? Did anyone attended the AGM ?
Any update on the USFDA plant inspection results and approvals ? It has been more than six months since the inspection was done.
I did attend the AGM. In very brief - personally I feel the co has been doing great work and has good molecules in pipeline. The USFDA had done the inspections for both API and formulation plant and there were some observations (considered minor in their opinion) and the company has given the necessary responses and done the corrective actions…the final response is awaited. This is the critical milestone for the next phase of growth of the company. Its seems there might not be growth triggers for an year or two but after that the company may do well.
Disc: I’m invested
I am hoping USFDA approval news after necessary corrections will bring in the next jump in the stock price. May be thats already priced in the current price. @ayushmit, what do you think as good buying price range for Shilpa for the newcomers ? Every time it goes below 900, i see some buying interest. And once in a while it is touching ~830 range in the past one year. Not sure if one should wait for such lows again.
Delighted to bring to you Shilpa Medicare 2015 AGM Management Q&A.
What is even more heartening for us is that the next rung of VP Contributors are now picking up the baton, and completing fantastic runs!
This detailed Q&A has been entirely planned and put together (queries compiled, strategised and painstakingly reproduced) by Ankit Gupta and Ananth Shenoy, supported by Ayush and other VP contributors.
We are sure this will help bring everyone on the same page on Shilpa quickly. Hoping to see folks joining in and focusing on “real” dissection of business.
As emphasised time & again, Management Q&As at VP should not be seen as Recommendations. These are reproductions of discussions with Management - where the accent is on understanding the business, the competitive intensity/advantages, longevity & sustainability of the business and the Managements preparedness/plans for the medium to longer term.
Newcomers to VP, please do not jump to any other conclusions. Valuations is an entirely different game and current Shilpa’s valuation look rich - especially as the next couple of years may be flattish.
Members also please refrain from requesting Entry/Exit targets (directly or indirectly) from other Members posting. SEBI Analyst regulations pretty clearly restrict that in public forums.
You might have noticed, as per Team VP Code of Conduct all above involved in the preparation and posting of Shilpa Management Q&A have disclosed details of their positions, and confirm that there have been no transactions in last 30 days (before the publication) by them. This will be a standard requirement of all Top Contributors at VP whenever they participate in publication of Stock Story, Management Q&A, Field Reports, or make any detailed post at VP
Just read the note on Shilpa. Must congratulate all the contributors and
Valupickr guys for making such a comprehensive note.
Its very informative and gives a lot of clarity with respect to the company.
Keep up the great work you guys are doing. Every time I read through
something on the website I am wiser.
I wasn’t able to attend the Shilpa AGM this time due to personal preoccupations.
Thanks to Ankit & Ananth, now I can try to come upto speed quickly. Just to get the discussions rolling, here are my initial thoughts from an initial reading.
Key business drivers for the medium term
Unlike earlier understanding (AGM 2014), Standalone ICE CRAMS revenues looks likely to continue/increase without declines. till FY17 at the least. FY15 this segment had contributed slightly more than half of standalone Sales. As shifting out entire production to JV is delayed (and consequent 50% revenue recognition), this segment contribution/growth looks secure?
With a 4x increase in capacity underway, the main growth driver in the medium term seems to be Capacetabine? Even assuming a 33% decline in price, we are still looking at least a 2.5x jump in Volumes/Revenues in couple of years. Do we know the timeframes of utilisation of this expanded capacity, how much to expect in FY16 for example. I would think a 1.5x- 2x jump straightaway, as there is no time to lose in view of more players in formulations market - implying more opportunity for Shilpa?
This again seems to be a positive development from what we had understood in 2014 AGM. This should offset the effect of Gemcitabine decline in volumes and still provide for decent additional growth?
The global market of Capacitabine is about 100T if I remember correctly. I don’t have any idea of Shilpa’s Capacetabine volumes but they should be having upwards of 10% market share (the ambitions are to reach a 25% market share here eventually?) easily, we may like to try and put a figure to the annual sales contribution from this product??
Imatinib Mysalate API
This is stated as the next big contributor after Capacitabine. This will start contributing from FY17 right? Again I may be mistaken, but I remember they were not so bullish about this at 2014 AGM, saying NATCO will be the main gainer, as they have sealed up relationships. And Shilpa had not invested much in augmenting capacities for the same. Again I see this as a positive development over AGM 2014.
FY 17 50 Cr revenue visibility. The first good visibility sign of a promising future growth driver?? with enough signs of a scalable opportunity with multiple relationships in a market where others will take 5 more years to enter??
Unable to factor in anything significant till FY17, because approvals taking time till June 2016 or later?
What is the Management view on delayed approvals impact on formulations player contracts for major molecules in FY17 like Imatinib Mysalate - where they may not be able to service the opportunity/or a major part of the opportunity?
Did we ask if there have been any major customer switches due to delays?
Those who attended the 2015 AGM, please comment freely on my observations. What are the other major takeaways from the discussions?
Disc: I remain invested from over 3 years.
Sorry for the delayed reply. Here is my pointwise reply to your points:
ICE Segment: The shift to the JV for the contract manufacturing of ursodeoxycholic acid will fully happen only in FY18. Also, till there is steady ramp up in JV operations, the standalone operations will continue to supply the product. There is a shortage of this molecule and Shilpa has orders for two years. Also, the JV has 2 - 2.50 times capacity than Shilpa’s current capacities for the molecule and since ICE is also a partner in it, the margins can be better in it. Also, both the management depending on the demand of the molecule, can further increase the capacities in the JV.
Capacetabine API: For me the main growth driver in the medium term (especially FY17) remain supply of APIs to the US markets post USFDA approval for the API plant. Coming specifically to Capacetabine even we were surprised when we heard about the capacity expansion for these molecule because of price erosion. Mr Bhutada sounded confident of doing well in the molecule despite price erosion since they have full backward integration for the molecule (up to N - 4/ N - 5 levels with N being the API). He also said that despite competition and entry of many generic players, the price erosion has just been around 30 - 40% in the API. Although, no timelines were mentioned for the utilisation of the expanded capacities, I think most of it should come in FY17 only. Ya they are targetting 25% of world’s total market of capacetabine in the future.
Imatinib Mysalate API: There are two factors which will determine success of the molecule: first is USFDA approval for the API plant and second being the approval of ANDA for the formulation player with which Shilpa has tied up for supply of API. I think they seem to have tied up with some formulator player for supply of API (doesnt look like Sun Pharma which has already tied up for the API supply) most probably post 2014 AGM. Again, it seems that they are fully backward integrated for APIs.
Japanese CRAMS: Although, it might not contribute much to revenues, margins can be pretty high. As written in the notes, few other Japanese formulators have inspected company’s facilities which might result in relationship with other players in medium to long term. One key aspect here is it takes long long time to forge a relationship with Japanese companies. I still remember him saying Japanese players start from few kgs and gradually increase it to tonnes.
Formulations: Formulations might see some revenues in FY17 only from EU or ROW markets like Mexico and Brazil or Argentina (if they clear inspections). However, major revenues will start only from FY18 onwards post USFDA approval. I think the FTF molecules that the partners have filled will only start getting approval in FY18 onwards. For other non-FTF molecules, company has tie up with three - four formulators. We did ask about customer switches but very few have switched till date.
Overall, I feel FY17 might see growth from supply of APIs to US markets (hopefully post approval) and Japanese CRAMS while major growth will only come in FY18 from formulations.